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There’s no shortage of things people look at to determine whether a company’s stock price will go up or down.
Technical indicators. Fundamental info. Crystal balls.
But there’s one number you can look to that (over the long haul, at least) will give you the best idea on the performance of a stock.
Ready to learn what it is? Drum roll, please…
It’s a company’s earnings. Their profits. How much cashola the company rakes in every quarter and every year.
It’s the number you need to pay attention to more than any other.
It’s really common sense. I mean, if a company doesn’t make money, it ain’t gonna stay in business.
And the more dinero a company makes, the more successful the company (and, generally, its stock) are gonna be.
Companies report earnings 4 times a year. Investors check out those earnings like sailors on leave check out waitresses at a Hooters.
In fact, you’ll often see ginormous swings in a company’s stock price when earnings reports are released (and sometimes even based on what’s expected in the next earnings reports).
Now it’s not just earnings or lack of earnings that move a company’s share price. It’s the expectations of future earnings. Companies like Amazon, Tesla and other “Growth” companies can go (and have gone) long periods of time losing. But their stock price keeps shooting higher and higher.
Cuz investors are salivating at how much money those companies could potentially make in the future. And the more hot and bothered investors get over potential earnings of a biz, the more they’ll push up its stock price.
Being some random schmuck on the Internet, you may not be sold on my take on the importance of earnings. So let’s let some experts – way smarter and experienced in the ways of the stock market than you or I – weigh in.
First there’s Willian O’Neill. Founder of Investors Business Daily. Author of the must read investing book “How to Make Money in Stocks”.
In the book, he lays out his popular investing system called CANSLIM.
You can read more about CANSLIM here but, for now, all you need to know is that the first TWO letters in the CANSLIM strategy – the “C” and the “A” – are ALL about earnings. Current quarterly earnings and Annual earnings.
Cuz, according to O’Neill, finding companies that have big increases in earnings is key to finding companies with the potential for big jumps in stock price. The bigger the earnings increase, the better.
Then there’s Jesse Livermore. In his excellent (and also, must read) investing book “How To Trade In Stocks” he says this…
“In the end, it is earnings—profits, and profit potential that moves stock, not emotions, like hope and greed. In the final analysis, it is profits, real and imagined, that eventually drive the price of stocks and remember that reality will always eventually set in to produce a final conclusion for the industry group and any particular stock.”
So if you’re looking to invest for the long haul, find companies that have a successful track record of producing strong earnings and/or you believe have an excellent chance of earnings growth for many years to come.
Put your money in enough companies like this that grow their earnings over the long haul and your investing dollars will grow along with them.