While watching Suze Orman on TV, a rare event for me, I heard Ms. Orman make a comment that, “A company cannot make money for you, unless it can make money for itself.”  In other words, earnings matter.

In developing a screening strategy that will work over a long period, one should include positive earnings as part of the screen.  A simple back testing experiment shows that this strategy does work over time.

In using data since 1986, companies that had positive earnings were compared to companies that had negative or no earnings.  The stock universe was limited to those which were at least $5/share as to avoid the penny stock realm.  A statistical analysis was used to determine whether a significant difference existed.  Companies were bought, held for one year, and reevaluated.

The average annualized return for stocks that had positive earnings was 12.0% ± 18%, while the average annualized return for stocks with negative or no earnings was 5.4% ± 46%.  What this data shows is that stocks with positive earnings average a higher return of investment with lower volatility.

Additionally, if one speculates in stocks that have negative or no earnings, s/he runs a 45% chance of losing some or all of his/her investment.  Compare that to only having a 1 in 4 chance of a negative experience with stocks with positive earnings.

Invest in companies that make money so they can make you money!


2 thoughts on “Earnings Matter

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