8 fundamental facts for fast growing company
Jeff. Gongye
analysis. Simply, “earnings” is just another word for “profits.” This
is a deceptively simple idea that is too often overlooked. As long as
any company is vital and able to grow its earnings consistently, its
stock will do well.
Sales Growth: This is one of the hardest numbers to fake. Sales are
the lifeblood of any business—whether it is selling a service, a
gadget, raw materials or anything else under the sun. There are many
ways that companies can temporarily find capital, such as selling off
assets or making outside investments, but it’s always bad news if
people aren’t buying what a business is selling. Great companies make
sure that sales increase month to month and year to year so they can
expand, dominate their industry and deliver big returns to
shareholders.
Earnings Surprises: One key metric I closely examine is whether or not
a stock is consistently beating analysts’ estimates. Beating estimates
is called an “Earnings Surprise.” I measure these as a percentage,
calculated as the difference between actual earnings and consensus
estimates. I grade over 5,000 stocks on this key metric and only
stocks with the highest grades are worthy of my recommendation. If a
stock beats Wall Street’s earnings forecast by a significant amount,
share prices can rally dramatically. This is why I closely monitor the
market to find stocks that regularly post earnings surprises. When I
find an unsung stock that has regularly performed better than the
“experts” have predicted, I recommend it on the premise that it should
top expectations again–and see shares surge.
Earnings Momentum: It’s not enough for me to see a company’s earnings
growth–I also want to see its rate of growth increase. This is what I
call earnings momentum. Simply, this measures how rapidly a company’s
earnings have been accelerating over the past four quarters. If a
stock has shown that it is making more and more profits every quarter,
it’s logical to think more of those profits will come back to
shareholders.
Cash Flow: Simply, cash flow is the money a company has left over
after paying for the costs of its business. This is a crucial
indicator of success because brisk sales and revenue don’t always add
up to big profits or an ability to expand. If every cent of a
company’s cash is tied up paying bills, a big sales number has a
limited impact. If a company is flush with capital and on top of its
game, it will deliver shareholders big profits!
Analysts Earnings Revisions: Upward revisions are an important
indicator of a company’s future success, especially in this do or die
environment. You see, analysts are paid to estimate a company’s
earnings outlook. If an analyst makes a wrong estimate that ends up
costing investors money, that analyst could be out of a job. If a
number of Wall Street analysts start to move their forecasts higher,
it’s a good bet that the stock will outperform expectations and
deliver market-beating returns to investors.
Operating Margin Growth: Making profits is all about the margin—the
difference between production costs and the retail price. A company
that’s able to expand its operating margins is usually a company that
has a dominant position in its industry. This company can raise prices
without seeing a drop-off in sales. That’s a nice place to be. But if
a company has to keep cutting prices to entice reluctant buyers, it’s
not a good sign.
Return on Equity: This is one of my gold standards. In simple terms,
Return on Equity is the amount of profits a company generates with the
money shareholders have invested. ROE tells me how efficiently a
company is managing its resources. I can’t interview every senior
manager at a company, so I like to think of ROE as a report card for
management. To check out a company’s Return on Equity, simply take a
business’s net income and divide that by the amount of money
shareholders own in common stock. If a company is run well, its net
income will dramatically outpace what investors have pumped into it.
If a company is lazy or poorly run, the value of shares investors own
will be more than the profits the company actually produces.