“If you wait for the robins, spring will be over.”
Those were Warren Buffett’s words to American investors on October 16, 2008 — amid the biggest stock market crash since the Great Depression.
Markets were far worse off then than they are now. The global financial system had all but seized up, as a mountain of subprime mortgage debt threatened to bankrupt virtually all of America’s biggest banks and hedge funds.
Meanwhile, the Oracle of Omaha saw blood in the streets, and he backed up the truck.
He was buying hand over fist and telling everyone out there to do the same.
Hence, his op-ed in the Wall Street Journal entitled “Buy American. I am.” On that day, the S&P 500 closed at just over $943.
While it’s true that markets continued to tumble in the short term, hindsight has proven that Buffett was calling out the buying opportunity of a generation.
If you took his advice and simply bought the index, you’d currently be sitting on a 519% gain.
While our latest pullback is nowhere near that same scale, it’s still a serious opportunity for investors who can identify promising stocks. And that’s precisely what I built my Green Zone Power Ratings systems to do…
Tracking Real-Time Growth With Green Zone Power Ratings
We’re obviously not privy to the board meetings and internal strategy discussed behind closed doors.
Instead, we’re limited to the information that the company publicly discloses in quarterly earnings reports. And there’s often a lot of “noise” that needs to be filtered out from this kind of short-term data.
Growth can vary from quarter to quarter or even year to year, based on where we are in the economic cycle. For a solid investment, we’re looking for something with more consistency and a long history of growth.
I designed Green Zone Power Ratings to distill all of this information into a simple, understandable number. Of course, knowing what’s going on in the background doesn’t hurt!
I can’t give you the secret sauce, per se, but I can give you an idea of what I’m talking about.
My Growth factor is a composite score made up of 18 subfactors. I look at growth in revenues, net income and earnings per share. And I use a variety of time frames, ranging from a single quarter to 10 years.
Tracking revenues, net income and earnings per share might seem redundant, but each has its place.
It starts with top-line revenue growth.
A company cannot sustain profits unless it grows its sales first.
Sure, cutting costs can boost earnings, even with flat or declining revenues — but only for a while. For sustainable earnings growth, you need a growing revenue stream supporting it.
All the same, revenue growth in the absence of earnings growth is nothing to get excited about. In fact, if revenues grow but net income doesn’t, that can be a sign of a company facing cutthroat competition and declining profitability.
We want net income to grow at least in tandem with revenues over time.
What about earnings per share … and how is that different from net income?
We calculate earnings per share by dividing net income by the number of shares.
If the company’s share count is stable, earnings per share should rise in line with net income.
However, share counts are not always stable. Companies issue new shares via secondary offerings or executive stock options and reduce their share counts with buybacks.
If I see earnings per share growing at a much slower pace than net income, that could be a sign of excessive share dilution and would make me think twice about buying the stock.
Of course, we can’t just stop there…
Growth Isn’t the Only Key
I’m a growth investor, and I love the challenge of looking for the next big mega trend. But I also know that investors can and often do overpay for growth.
That’s why my Green Zone Power Ratings system incorporates Growth as just one of six different factors to determine whether a stock will outperform the market.
But when it comes to determining a company’s future success … Growth is critical.
To good profits,
Adam O’Dell
Chief Investment Strategist, Money & Markets
