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.