Two Keys to Unlimited Investing Success
By
Andrew Mickey
We’re in the heart of earnings season and millions of investors are sitting on the edge of their seats every day. In one single trading session, a stock can easily move either up or down 15% due to one single announcement.
Sometimes it seems like a crapshoot and invariably you’re going to be on one side or the other. But by focusing on two single metrics, stellar results can be achieved each and every earnings season. I wish it would be as easy as punching a few numbers into a stock screen, but it’s not.
Along with the first earnings season of 2007, we get the most important document a company publishes all year: the annual report or 10-K. Within that document is a wealth of information that you can’t get at any other time of the year.
Granted it’s a lot of legal mumbo jumbo and dozens of pages that seem devoted to meeting SEC requirements, but it also holds the two most important metrics that prove the true health of a company: the order backlog and operating margins.
These are by far the two most important metrics in today’s stock market. It’s too easy for professional accountants to make more traditional valuation metrics like price-to-earnings ratios, return on equity, and price-to-book.
These two metrics will have you resting easy each and every earnings season. Let me explain.
A growing order backlog is a very strong indicator for a company, which is why I won’t recommend a company that doesn’t have one. After all, a company has to be able to sell its products to make money and in turn, make its stock go up. And a growing order backlog proves a company is getting more orders than it can handle.
Just think of Krispy Kreme (KKD:NYSE). A few years ago, each new storefront was facing customers willing to wait for hours to get their hands on its addictive donuts while the “Hot Now” light was on. They were making money hand over fist and the stock price was soaring.
However, once too many stores were opened, the demand for the company’s donuts plummeted. There were no more throngs of hungry customers willing to wake up at 4:00 a.m. just to throw their Atkins diet regimen out the window or disregard their “doctor’s orders” for a day for a craving.
As a result, Krispy Kreme plummeted and has boarded up hundreds of locations around the country. Think of every industry like the donut industry.
Right now, the largest backorder logs are being faced by a number of industries. But South Korea’s shipyards are by far the most backed up. Conglomerates including Hyundai, Samsung, and Daewoo cannot make ships fast enough.
As a result, they’re getting away with charging top dollar for their ships because their customers have no other option. For now, it’s a great business to be in.
The second key metric is expanding operating margins. Operating margins consist of the amount of profits left over after a business has paid its employees, raw materials, and depreciation. Essentially, it incorporates all the costs of doing business.
Unlike net income, you won’t see variations from one-time sales of equipment, one-time merger costs, variable tax expenses, or stock-based compensation expenses in the operating profit of the company. Most of the time, these expenses don’t even cost a business any cash.
To find the operating margin, you divide the operating profit by revenues and get the operating margin. Then you compare operating margin from quarter to quarter and year to year usually over two years against that of its competitors.
Then, if you see a definite trend in operating margin growth, you know you’ve got a winner. An expanding operating margin proves that a company is successfully selling its products without spending too much on sales staff or sacrificing its future by offering big discounts.
BreakAway Investor focuses primarily on these two metrics. Granted, I probably spend more time staring at an Excel spreadsheet than my optometrist would like, but so far this earnings season that focus has really paid off. Since the earnings season kicked off, two BreakAway picks have surged more than 25% each in less than three months thanks to the consistent earnings growth fueled by these two metrics.
You see, Wall Street failed to take note of what was actually going on within these companies and failed to measure the true level of demand for their products. However, their Google-like consistency each quarter is quickly turning them into the next Wall Street darlings.
And earlier this week, earnings passed with no sweat for one small BreakAway healthcare stock that’s been trouncing the competition… simply because the company has no competition. It created its own opportunity in the healthcare payments industry and now has a growing order backlog that accounts for more than two years’ worth of sales.
http://www.taipanfinancialnews.com/videos.php?showID=13&channelID=2
Customers are basically lined up at the front door trying to get their hands on this company’s products and services. It’s like a Krispy Kreme grand opening with more than 1,000 customers waiting in line. Demand is that high and so strong that the company can hardly fail.
Wouldn’t you like to be in that business? You can be. All it takes is a simple phone call to your broker to become a stockholder and you’re in.