Navellier Growth: your source for market-beating growth stocks

 

When it comes to stock investing, I find investors are always looking for that magic bullet. That secret bit of stock advice will help them uncover great stocks. Hands down, one of the most powerful indicators of a good stock is its earnings. Corporate earnings are the amount of profit a company earns for a reporting period. In its simplest form, it measures how much a company sold for the quarter and then subtracts out how much they spent on raw materials, administrative costs, sales costs and all the other costs of doing business. (In reality, given the complicated methods of corporate accounting it takes to calculate these figures, it is not quite that simple but it will do for our purposes.) Most companies report earnings to investors every three months during earnings season. It is these numbers that are carefully watched, not just by me but also by all of Wall Street. Earnings are usually reported as earnings per share, or EPS. This is simply the company's total earnings divided by the number of shares of stock the company has outstanding.

Ultimately, the worth of a particular company, and therefore its stock market price, is based on how much money they make. So you can see why corporate earnings are so important–they reflect the current state of a company's health. Most companies have analysts looking into a company's progress and issuing reports and estimates of what the earnings are expected to be for the next several quarters. These are merely "educated guesses" of course, and are what we call analyst estimates.

When all the analysts that cover a particular stock have issued their guess, Wall Street adds those numbers up and divides it by the number of analysts to reveal the consensus estimate. It's very important to track these consensus numbers, as they add a great deal of insight into the four earnings fundamentals I recommend that you watch carefully.

Four earnings fundamentals

1. Earnings revisions. You want to look for positive revisions, when analysts indicate that business is better than originally expected. Beware negative revisions, when analysts lower their original estimates. This is not news Wall Street likes to see. Often downward revisions result in a drop in the company's stock price.

2. Earnings surprises. Again, you want to look for the positive. When a company announces corporate earnings higher than analysts expected, this is good news and the company's stock is usually rewarded with a rise in price.

3. Another element to watch closely is earnings growth. I want to see stocks that are making more money than last quarter and last year. This only happens when a company is excelling in their business and their products and services are in high demand. Naturally, this is the kind of a company that becomes a great growth stock.

4. Last, but by no means least, pay attention to earnings momentum. This reveals the rate of a company's growth. For example, if Company A grew earnings 10% last quarter than I want to see growth of MORE than 10% this quarter. This can be a powerful force on stock prices as investors base their estimate of a stocks price largely on earnings. If the company can grow faster and faster quarter after quarter (and year after year), that value is going to grow right along with the earnings.

Now, you can track such earnings information about any stock at most financial websites on the web. Of course, as a growth investor obsessed with earnings, I track these fundamentals every week for nearly every stock on Wall Street. In fact, I have an exclusive online tool called PortfolioGrader Pro that shows you the ratings of any stock in all four of these earnings categories: earning revisions, earnings surprises, earnings growth and earnings momentum. Best of all, you can log in to see the ratings of your stocks in this tool anytime, FREE.

So if you're interested in seeing clear A-F ratings in these four earnings categories. As well as the other four fundamental categories I use to rate stocks, Log on now FREE .

Recent Investing Info-to-Know Articles:
Getting Rich the Growth Way
PortfolioGrader Pro: Profit from the Earnings Run-Up!
Louis' exclusive investment videos
How to Invest: Guided by earnings
Investing: The Power of Growth

Visit the Investing Info-to-Know Archive
Visit our complete article archive