Quarterly earnings season is here. Before I see a single report, I can predict one thing with 100% confidence.
In the next three weeks, you will read or hear these words, perhaps verbatim, in the news more than once:
“Shares of _____ sold off despite earnings-per-share that matched analysts’ estimates. Investors still questioned growth prospects because the firm’s top line fell short of expectations.”
The lesson: There is a lot of air between the top and bottom, especially on an earnings statement.
You always get a better view from the mountain peak than the swamp level below. Likewise, the bottle perched on the wine merchant’s top shelf is far superior to the bottom-row jug.
This qualitative difference between top and bottom also applies to investing, especially when you analyze corporate income statements.
The “top line” revenue total is “real” money the firm captured. Impressive or not, revenue has the advantage of being hard to manipulate.
The “bottom line” earnings number is highly questionable.
All the lines in between — depreciation, good-will adjustments, inventory revaluations, dilution factors and countless other adjustments and “extraordinary items” — can render the bottom line “net income” figure almost useless as a gauge of success.
The irony is immense. How do you abbreviate “balance sheet”? B.S.!
We can’t make Wall Street change its ways, but we don’t have to cooperate. Ignore the cryptography-school dropouts who produce most corporate reports. I look for investment ideas in the numbers least subject to executive manipulation.
I have three favorites.
Revenue: While the top line is sometimes adjusted, such as when firms amortize some sales, revenue is arguably one of the most “real” numbers on a typical corporate financial statement.
Dividends: Like revenue, dividends are real, spendable dollars (with the exception of stock dividends, of course). Tax treatment can also vary. Nevertheless, when you receive a dividend, you have money in hand and the company can’t use trickery to take it back. Dividends are fine, top-shelf wine.
Five-Year Revenue and Dividend Growth: A sustained upward trend in these two key metrics is the key to measuring a company’s true substance.
With bond yields soaring as the Fed plots the end of QE, distressed bond investors are considering stocks. If you’re one of them, I may have some ideas for you.
I recently designed a new screening program to find top-line growth. It sorts through the thousands of domestic and foreign stocks listed on U.S. exchanges. Like an electronic bloodhound, my software sniffs out stocks with all four of these characteristics.
- Revenue above $50 billion: I want firms with substance, as reflected in their “no funny business” top lines.
- Five-year annualized revenue growth of at least 6%: This means the no-nonsense top line is trending higher.
- Dividend yield of at least 3.5%: The investor’s return in real dollars—as opposed to questionable earnings data—should be higher than corporate bonds.
- Five-year annualized dividend growth of at least 5%: I want to be in stocks where my dividends can grow. If I wanted “fixed” income, I would buy corporate bonds.
Running this screen turns up these five names. With stocks based in Australia, the United States, Switzerland and two from the world’s most populous nation of China, the quintet offers ample geographic diversity.
We also have sector diversification, with members of the group in telecom, energy, pharmaceuticals, semiconductors and metals/minerals.
Geographically, this group offers interesting diversity.
5 STOCKS FOR TOP-LINE INVESTORS!
These five companies personify the worldwide socio-economic “mega-trends” that guide my Global Trend Trader investment service. In fact, two of these “top-line-substance and tangible-payments-to-owners” group members are already in the Global Trend Trader model portfolio.
If these stocks can sustain their current revenue and dividend-growth rates, the returns should soundly thrash the fixed-income alternatives.
I think they will, too.
Because they focused on the top line first, dividend payouts for these stocks are just now catching up with their big—and still expanding—revenue bases.
In fact, the stocks in my screen all boast double-digit dividend growth rates, except for China Mobile Ltd. (CHL), and it is only a tenth of a percentage point behind.
With political and economic instability around the globe, surging interest rates, ObamaCare uncertainty, trouble in Portugal and massive demonstrations in Turkey, Brazil and Egypt, companies like these offer a relatively “safe harbor” for weary investors.
Years ago I heard an old investment saying, one I’ve always remembered. “The only thing better than well-rounded concepts are rectangular dollars.”
In a world filled with fuzzy concepts, I like rectangular dollars. I’ll bet you do, too. So check out the five stocks on my list. I think you’ll like what you see.
P.S. My Global Trend Trader service is currently closed to new members, but keep an eye on your e-mail for a special, limited-time opportunity to secure your spot in it.
We’ll even include Tony Sagami’s International ETF Trader, James DiGeorgia’s Junior Resource Millionaire service and everything else Uncommon Wisdom publishes … for a deeply discounted, special price that won’t last long.
Don’t miss out — watch your e-mail every day so you’ll be among the first to see this extraordinary offer when it comes your way!