I have only studied three companies in my life in which the following the following standard did not produce a good investment: Look for companies with high earnings per share growth that are supported by strong revenue growth and trading at a reasonable valuation. The only times this hasn’t worked out before involved General Electric, Wachovia, and Hostess (the first two had debt and liquidity problems, and the last had labor disputes that destroyed what should have been an excellent lifelong holding.)
Usually, high revenue growth is a sign of a business in good health. Earnings per share growth without revenue growth is likely a result of management strategy, ranging from stock buybacks to cost cuts to productivity gains. And revenue growth without earnings per share growth is likely a signal of share dilution (that’s the problem with Amazon and Facebook right now; the financial news media are often reporting … Read the rest of this article!
There are some people who look at The NASDAQ Index taking fifteen years to pass its 2000 highs and conclude that is some proof that the stock market is “rigged” or a “casino.” After all, if buying the largest technology names and holding them for fifteen years earns you 1% nominal returns (because of the dividends) and -2% actual returns (because of the inflation), then it seems to follow that a super-long period of no wealth-building would result in some skepticism about stock market participation in general.
This particular fear can easily be conquered if you come to appreciate that: (1) even dominant enterprises can become so overvalued that they will deliver disappointing returns even as profits continue to grow at a fast clip, and (2) a basic P/E ratio analysis will tip you off that something is unhinged about the valuation.
Out of the ten largest NASDAQ holdings in … Read the rest of this article!
It is not terribly unusual for some companies to create a dual class structure for the stock. Hershey, Google, and Ford immediately come to mind. In every example of this I have ever studied, the purpose is to keep ownership control in the hands of a select few that want to maintain control over the company by scaling back their investment in it. It’s a controversial practice—people think that investors with $500 million worth of stock should wield 10x as much influence as someone with $50 million in the firm. Others find the practice tolerable because investors have notice of the arrangement at the time they make their investment, and plus, the original founding families that own the firm through the decades may have more of a long-term orientation than some random guy that gets his hands on a large block of stock.
Brown Forman, one of the most legendary … Read the rest of this article!