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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (79)	3/17/1998 12:41:00 AM
From: Berney	Read Replies (1) \| Respond to of 1722

The Importance of Corporate Earnings The Prudent Investor must be concerned with the quality of a company's earnings as well as the subsequent use of those earnings. In 1996, I undertook a study of the relationship between earnings growth and stock appreciation. The universe for this study was the approximately 5,000 companies in the Standard and Poors Stock Guide. I selected stocks that reflected 1) a five-year earnings growth rate, and 2) an annualized investment return for one, three and five years. The dramatic results are as follows: EARNINGS TOTAL MEDIAN ANNUAL INVESTMENT RETURN GROWTH STOCKS 1 YEAR 3 YEARS 5 YEARS NEGATIVE 858 -1.3% -2.6% 2.4% POSITIVE 1,534 20.4% 14.9% 16.9% TOTAL 2,392 10.3% 7.8% 11.6% It is important to note that the study did not specify that earnings had to grow by any arbitrary growth rate. Stocks of certain industries, such as Aerospace/Defense, Oil and Mining, Cable, and Real Estate Investment Trusts, do not favorably subject themselves to an earnings growth analysis; yet, the investment return was very favorable for many of the companies in these industries. If these industries had been excluded, the results would have been even more dramatic. Earnings are the essential result of the efforts of a company and the acceptance of its products and services in the marketplace. Without earnings, the investor must believe that some change is going to occur within the company or the marketplace. I believe that the sole reliance on future events without historical corroboration is more within the concept of speculation than investing. The Prudent Investors will invest in the big universe of companies showing consistent, positive earnings. The earnings growth of Corporate America has been the catalyst that has fueled the incredible increase in market value over the last five years. Consider the following table: YEAR S&P 500 AVERAGE S&P PE ENDING INDEX CO EARNINGS RATIO 12/31/92 435.71 19.02 22.8 12/31/93 460.45 21.89 21.3 12/31/94 459.27 30.60 15.0 12/31/95 615.93 33.96 18.1 12/31/96 756.80 38.73 19.5 12/31/97 936.46 41.68 (est) 22.5 Was the Index fairly valued at the end of 1992 at a PE Ratio of 22.8? How about at the end of 1994 at a PE Ratio of 15? The greater issue is that, while the Index appreciated 115% over the five years, the earnings increased 119%. I can only conclude that whether we focus on a company or the market, the Prudent Investor must keep his eyes on the prize -- earnings. Enjoy! Berney P.S. Want to hear something really crazy? The S&P study was done manually, entering thousands of data elements into a spreadsheet. All because I asked myself a silly question one evening: Do Earnings Matter?