Back in the year 2000 an old friend of mine asked me to come up with a list of stocks that he might want to purchase with the fat salary and bonuses he was then making in commercial real estate. Not surprisingly, a couple of guys in their mid-30's at that time came up with 10 or 12 ideas, every single one of them a technology or internet company. We printed up the current stock price, a brief profile on the company, their current sales figures, and the 52-week high and low. My buddy's Uncle, then 67 years old, asked to see our little list and very politely pointed out, "There's just one thing missing here, guys."
"What's that?" my buddy asked.
My buddy, in a somewhat condescending tone, explained to his uncle that "these days, earnings don't matter, Uncle Jim."
A few months later the tech bubble burst, NASDAQ crashed, and is still below 2,000, when it was at about 5,000 at that time!
Earnings don't matter?
Good thing Uncle Jim knew better. Five years later he passed away and, having no children of his own, left a stock portfolio worth just shy of $1 million to his three nieces and two nephews, even the one who tried to tell him that earnings don't matter. Since that time I have never bought a stock in a company that is not showing a profit/earnings. And, by golly, not one of my companies has ever gone bankrupt or had their stock de-listed--having, like, a profit can really keep a company out of trouble as it turns out. I don't buy sexy, exciting companies--I buy companies with strong brand names quietly churning out millions of dollars a year in profits. Companies like the JM Smucker Company. Most people would think--you want me to buy stock in a jelly and jam company? No. Dig a little deeper and you see that they own all of the following brands: Crisco, Jif, Hungry Jack, PET, and Pillsbury. Look at their income statement and you'll see that their sales jumped from about $2.5 billion in 2008 to $3.7 billion in 2009, after climbing steadily the previous three years. Their net profit margin is fairly high for their industry space --7.08%. We all probably use some of their products, or know people who do. Therefore, I'll become rich off the 100 shares I purchased this morning, right?
Unfortunately, no one can tell you that. I don't care if they use modern portfolio theory, technical analysis, or the kind of fundamental analysis I'm referring to in this post--nobody knows the future. Not even Warren Buffett. The name of Buffett's company, Berkshire Hathaway, by the way, comes from the first acquisition Buffett ever made, which, ironically, turned out to be one of his all-time worst investments . . . a textile manufacturer.
In any case, your assignment today is to take some big, boring company like Microsoft, IBM, J M Smucker, or Procter & Gamble, and look at a profile. What are their sales/revenue? What are their profits? Do they pay a dividend? How much, and what is the dividend yield? Smucker's (SJM) is trading for about 15 times earnings (P/E ratio), pays a dividend of $1.40, for a dividend yield of 2.9%. What about the companies that you're interested in?