The undeniable correlation…
The one number that matters when it comes to share price direction is…Earnings.
And even the greatest investors agree, earnings are what drive share prices.
You see, it makes sense that companies who consistently grow earnings every year will attract more investors. And when they attract more investors, this raises the share price because of an increase in demand.
But now, let me show you with two examples how earnings and share prices are closely correlated.
Clicks’ earnings and share price have closely tracked each other over five years
The example above shows retail group Clicks’ earnings over the past five years. You can see the company increased its earnings every year since 2012.
Overall, Clicks’ earnings have grown at a yearly average of 13% for the last five years. The interesting part, over the same time Clicks share price has grown at a yearly average of 15.4%.
So you can see the close correlation between increasing earnings and share price.
The next example proves that earnings and share prices are closely correlated.
MTN’s five year earning history
You’ll see I’ve added a “share price movement” column to illustrate the impact decreasing earnings has on share prices.
From 2012 to 2014, MTN’s earnings increased from 1,089c to 1,536c. During this time, MTN’s shares increased from R177 to R221.
However, in 2015 MTN’s earnings fell. They fell even more in 2016. And during this time, MTN’s shares fell from over R200 to R126.
So it’s quite simple…
If earnings rise, share prices are likely to rise.
If earnings fall, share prices are likely to fall.
Forget everything else and focus on earnings to uncover profitable stocks
The reason is simple. Owning shares isn’t a lottery ticket. It’s part ownership of a business. And earnings determine what a company is worth.
Although there are always bumps along the way, you’ll find there’s a near perfect correlation between a company’s growth in earnings per share and the movement of its share from year to year.
So the fact is, you can forget all the mumbo-jumbo, investment jargon and complicated market trivia. Instead, remember in most cases, share prices follow earnings.
And if you looking to make money from stocks, buy ones that are growing profits.
Until next time,
Always remember, knowledge brings you wealth,