Growth in Net Earnings Per Share: The Only Thing That Matters
by Alexander Green, Investment U Chief Investment Strategist
Monday, July 25, 2011: Issue #1563
If, like many stock investors, you have struggled to make money in the current market environment, it may be because you’re not focusing on the only thing that really matters.
Perhaps you’ve been distracted by analysts who are nattering about annual GDP growth, unemployment, oil prices, the Greek crisis, or the U.S. debt limit. These things don’t tell you how to invest in the stock market. There’s something else that’s far more important. In fact, I call it “the only thing that really matters.” And I have a good example to illustrate my point.
On my way to an investment conference in Seattle last week, I caught a connecting flight in Charlotte.
As this is the peak of the tourist season, the Charlotte airport was so jam-packed it felt almost claustrophobic.
In the shopping mall area near the food court, there was a new Blackberry store that sells smartphones and other mobile devices made by Research In Motion (Nasdaq: RIMM). Yet I noticed something unusual.
There were only two people in the store. And both of them had name badges with the word “Blackberry” on it. There wasn’t a single customer inside.
Contrast this with the scene that virtually all of us have witnessed at any Apple store in the country.
They’re swarming with customers. (Most Apple stores don’t even bother answering the phone.) There are lines at the cash registers, even though mobile sales reps are ringing up customers in the aisles as well. People are crazy about iMacs, iPhones, iPads and the iTunes music store they can access with their computers and cellphones.
Given these two dramatically different retail scenes, is it really surprising that last week Apple (Nasdaq: AAPL) hit a new all-time high and Research In Motion hit a new 52-week low?
RIMM’s Blackberry device is getting thumped by both Apple’s sleek new phones and Google’s exciting new Android operating system. In the Darwinian world of capitalism, the Blackberry is getting folded, spindled and mutilated.
Reflect on this for a second. Because the important thing isn’t whether you have been bullish or bearish on the market lately, but whether you were bullish or bearish on companies like Apple and Research In Motion. No amount of economic analysis could have told you to buy Apple and shun Research In Motion. For that, you needed to do a business analysis instead. In particular, you needed to recognize that Apple’s business is on fire (earnings almost doubled from a year ago) and Research In Motion is going down in flames.
A trip to your local mall could have given you an important heads up, because robust top-line growth (sales) often leads to exceptional bottom-line results (earnings). And share prices follow earnings.
If you want to make money in the stock market, don’t jabber about world geo-political events – or follow those who do – but focus on the only thing that really matters in the stock market: growth in net earnings per share.
You can make stock investing a lot more complicated than this. But you really don’t need to.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
10 Responses to “Growth in Net Earnings Per Share: The Only Thing That Matters”
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Do you have an opn. on ATRN
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The thing I find objectionable about your communications are the long winded oral presentations. I can read 20 times faster than our presenters are talking. I will no longer listen to any of them.
There is no reason to delay the written version for a week. Software can convert words to writing very quickly. Please see what you can do to change this.
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I agree wholeheartedly!
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Why isn’t Apple in any of the Oxford portfolios?
Why aren’t other recommendations in Investment U included in Oxford portfolios?
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Good advice — keep it simple. Peter Lynch who ran the Magellan Fund used the same approach by visiting stores, restaurants, etc., to see where and what people were buying.
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Interesting about Rim message of Green’s.
However, three weeks ago I was in Dawson City YUkon.
I could not get my Iphone to text. I went to a
Internet Cafe for help. The help failed, it seems
the Apple network will not work there. They apologized, and suggested I get a Blackberry like their other customers.
Walter
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The audio was in and out. I heard little of the comments.
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Thanks Alexander for your commentary. Although I am sure that you are a far better investor than I will ever be I disagree that geopolitical risks basically don’t matter or at least aren’t worth emphasizing.
Just as a rising market tends to “lift all boats” (this is not true for all stocks of course but still is generally true) so a tanking market tends to lower the price of stocks even good ones even if this is only for a relatively short period of time say from several months or a bit less to two years or more. There is a lot of geopolitical risk right now and this could cause paralysis on the part of investors which could very well lead to some missed opportunities but still my general advice would be to consider being very nimble about taking profits and/or preserving capital if the market goes into correction mode. It would be very interesting to view a detailed study or even a cursory report on how even good stocks did during the great depression or the more sever recessions since then. Perhaps you could comment on that as it would be of interest to me and other investors. I know that some gold stocks did extremely well during the great depression whereas my guest would be that financial stocks and many other sectors tanked.
Personally I like alternative investments like precious metals even though they have increased dramatically in price since the beginning of their bull market. I believe that commodity based stocks will generally be the hottest sector for the next 3-5 years at least despite the fact that neither I nor anyone has a crystal ball and nothing is a sure bet in investing.
Additionally for those with considerable wealth an investment if farmland could be very wise. Still you have given me ‘food for thought.’ One rule of yours that I ignored to disastrous results is having sell discipline and stops or trailing stops in place if a position moves against you. I became lazy and ‘married to my investment choices’ which as I said created big losses in my portfolio.
Best,
John S.
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perfect
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Very much agree. It’s so simple yet it’s easy to get caught up in all the hype of the media. Point well taken. Thanks.
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