In April I blogged about EPS Growth, and followed this with a post about profitability (Replace “E” with “A” to Truly Understand Business Profitability). Today, I focus on a combination of these profitability and growth measures, which I call “Profitable Growth”.
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Unilever in Indonesia generates an amazingly high level of profitability, with a return on equity (ROE) of more than 100%. What’s more, this large-cap stock has low correlation with Western stock markets, low volatility compared with other Indonesian stocks, and strong earnings momentum
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If a company can generate a good net profit relative to the assets it invests in, its return on assets (ROA) is strong. ROA is a measurement that matches the way a manager thinks about business – What assets do I need? What do I get in return?
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This third largest supermarket chain in Singapore, Sheng Siong Group Limited, has 35 outlets and steady EPS growth. This mid-cap stock has strong profitability, low volatility, no debt and good price momentum, though this combination does not come cheap. I like the steady, defensive nature of its business and its slow rise in net profit margin over the past two years.
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Whether managing a business or investing in one, it is critical to focus on earnings-per-share (EPS) growth. This one measure tells almost the entire story of a business. My analysis of 8,000 companies across the globe shows that their combined EPS has been contracting by 3% per year over the last four years.
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A recent article in The New York Times Upshot section by the Harvard economist, Professor Sendhil Mullainathan, titled, “Why a Harvard Professor Has Mixed Feelings When Students Take Jobs in Finance” was a weak attempt at arguing the case that finance professionals add little to no value to society and that people working in the industry are mainly carrying out immoral or illegal acts.
This is my reply.
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It’s a choice that’s nearly a matter of financial life or death. Deciding the right number of stocks to hold in your portfolio is a balance between risk and return – too few and your risk is high, too many and you might as well own a broad market fund or ETF. Research shows that the average active investor owns only two! That’s far too low.
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So you think you are an above-average investor? Svenson (1981) asked Americans and Swedes whether they were above-average drivers. His findings were that more than 90% of Americans and about 70% of Swedes thought of themselves to be more skillful drivers than the average. The impossibility of these perceptions demonstrates the existence of overconfidence bias among humans.
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My research covering 4,000 companies across the world shows that, over the past 22 years, financial analysts have been wrong in their earnings forecasts about 33% of the time.
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