How To Find Value In Growth Stocks: More On Earnings
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This article is from the How to Start an Investment Program tutorial, author unknown.
How To Find Value In Growth Stocks: More On Earnings
In dealing with small, growth oriented companies, remember this important point: the price of the stock generally follows earnings up or down. It's much the same as if you were going to buy a business and had several under consideration. All things being the same, you would have a greater interest in buying the practice that had a history, and the future potential, of higher earnings. Stocks are no different. More investors are interested in the companies that have greater earnings. And with more potential investors, the price of the stock gets bid higher.
Earnings are important, but more so are the earnings Per Share. If a company with "x" amount of earnings suddenly sells more shares on the market, the earnings become diluted and the stock usually drops. The pie, in other words, gets cut even thinner. Regardless of how much money a company earns, investors should be more concerned with the EPS. This number, along with the earnings and the number of shares outstanding, can be obtained from your broker, online from sources such as the Institutional Brokers Estimate System (IBES) or Zacks, or at the public library in the Value Line publication.
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