At the end of the day, all stock price movements can be traced back to earnings. Through up and down markets using the earnings estimate revision has provided extraordinary, life-changing results for investors.
I wasn’t always a good investor. Over the past 32 years I’ve made just about every mistake imaginable:
• Jumped in at the peak
• Jumped out too late
• Bought falling knives
• Doubled down on losers
You name it, I probably did it.
By the time I joined up with Zacks Investment Research in August 1999, I had eradicated most of those bad habits. But as Len Zacks and his brother Ben pointed out … I had a lot to learn.
What they taught me is that, indeed, earnings estimate revisions (EER) are the most powerful force impacting stock prices.
The timing of this profound investment message could not have been better for me. As the stock market bubble popped in 2000, I started to apply this new investing approach. So even though the market tumbled that year, I actually gained 16% in my personal account.
Was I hooked? Heck yes!!!
Three reasons to love EER
Each year my knowledge and passion for this approach has grown. And there is nothing I like more than to share the wisdom of this investing strategy with others. My goal today is to spread some of that wisdom on to you so you can also enjoy great investment success in the years to come.
1. The most fundamentally sound metric
There are so many different websites, magazines, books, TV stations, etc., dedicated to investments. The amount of information overload is so unbearable that most investors walk away horribly confused about what is truly important to achieve success. So let me simplify the matter so you can push away all that noise and nonsense in the future.
At the end of the day, all stock price movements can be traced back to earnings.
Read that line again so it really sinks in. The reason it's true is from the basic fact that when you buy shares in a company, you are actually buying a percentage ownership stake in that firm. And if you are the owner of a company, big or small, then the single most important metric to gauge success is how much earnings are generated.
If profits go higher than expected, the share price will rise. Conversely if profits go lower than expected, the share price will come down. The stock market has always worked on this premise and it always will. And nothing captures the essence of this notion more than earnings estimate revisions.
2. Applies to every type of investor
Because all stock price movements can be traced back to earnings, it follows that earnings should be at the heart of every investment decision. But that is not the same as saying that earnings are the ONLY thing to consider when selecting a stock. That is just the starting point. From there, each investor can layer on other concepts such as value, growth, charts, etc., to find the stocks that fit his or her unique approach.
My favorite analogy for this is to say that earnings are to stock investing as flour is to baking. That's because nearly 100% of baked goods include flour in the recipe. What makes each item unique and delicious is what you add into it (sugar, flavorings, nuts, fruit, butter, etc.). Each way works out well, but each starts with flour to make it all come together. So you can apply other factors on top of earnings and estimates to make it suit your unique investment tastes as well.
3. It works!
When you put the philosophy and analogies aside, EERs simply work. This is clearly proven by the market-crushing +26% average annual returns of the Zacks Rank since 1988. Through up and down markets it has provided extraordinary, life-changing results for investors.
I can certainly testify that is true for me. So I know it can do the same for you too.
Steve is the Executive VP in charge of Zacks.com and all of its subscription services.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.