Collection: Peter Lynch - #44 'Stock Price Follow Earnings'



[Transcript]

PETER LYNCH 00:00

The price of a stock will follow the direction of earnings.


In almost every case you can generally state, if the company’s earnings go up sharply, the stock is going to go up. If earnings go from very poor to mediocre the stock is probably going to rise. If they go from mediocre to good it’s probably going to have another rise, if it goes from good to excellent it’s probably going to have another rise.


Or if a company’s earnings grow dramatically over a long period of time, the stocks probably going to go up dramatically.


Even if you have a Waterford Crystal Ball, you probably can’t predict a company’s earnings. But Wall Street is a whole army of people and make such predictions. By computer you can get Wall Street earnings estimates in the research section of the stock shop or through many other online services or you can go to your local library and find earnings estimates in Value Line or Standard & Poor’s.


Obviously, you want to invest in companies whose earnings are expected to rise, but again these are just estimates. If you really understand a company, you should know how it plans to make earnings rise. If you know it has good growth prospects, then you will be better able to evaluate the company as an investment.


You can’t predict the future, but you can learn from the past. A company with a long history of earnings increases and dividend increases is obviously a stable performer that has a reasonable chance to continue to perform well in the industry. Many times, that’s a good company to investigate further.


Johnson & Johnson (NYSE:JNJ) has raised its earnings something like 19 in the last 20 years. It has raised its dividend over 30 years in a row. But just because a company has had a great record in the past, does not mean earnings will grow terrifically well in the future. You have to have reasons for it.


Strong growth and research and development, cost cutting, new products, great brand name and a terrific balance sheet were the items that made me optimistic about Johnson & Johnson.


What was the outlook that it is going to keep continuing to grow? If they run out of steam, the stock is going to run out of steam.


(Source: https://youtu.be/cRMpgaBv-U4)

 

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