The Three Basic Trends
There are three basic trends that you want to pay attention to when you are considering purchasing a stock. These three trends are revenues, earnings, and price.
Each one of these three trends has its own weight and its own momentum. Once one of these trends is in place, it takes something new and different to turn it around and make it go in the opposite direction.
Of the three trends, the most important trend is revenues. As an investor, if you will keep a close eye on revenues, you will know whether or not your company has customers. Nothing is more important to a company than having customers.
Not only are revenues important, but the direction the revenues are going is equally important. If the revenues are increasing, the companies customer base is growing-either in absolute numbers or in quality. If the revenues are decreasing, the companies customer base is decreasing.
The second most important trend is earnings. Earnings tell you whether or not a company is able to service its customers at a reasonable cost. If earnings are on the rise, it is likely that the company is offering its customers a better and better deal.
Why are revenues more important than earnings? Revenues are more important because first, a company must have customers. Revenues must come first for this reason. Earnings come in as a close second because once a company has customers, it must service them well.
The third most important trend to you as an investor is the price of the stock. This trend is a distant third in importance.
Yes, price is an important trend. It is important because this trend-- like any other trend--is reluctant to reverse itself. Because this trend seldom turns around, you should be reluctant to buy a stock whose price is going down.
At the same time, you should be aware that the three trends often experience divergences for short periods of time. What kind of divergence? All three do not always go in the same direction at the same time.
If you see a company whose price is going down, but whose revenues and earnings are on the rise, you might want to consider investing in this company. This is the kind of divergence you should take advantage of.
Let the price fall as far as you can stand to let it fall but do invest in the company if the divergence between the underlying fundamentals of the company and its price becomes particularly strong.
If the price has fallen for an unusually long time and the earnings and revenues have continued to make positive gains for as long or longer, you may have before you a golden company. Consider investing.
Yes, you should be reluctant to invest in any company that is negative on any one of these three basic trends. But do be willing to reconsider if both revenues and earnings are trending upward and have done so for a very long time.
Remember this! When it comes to trends, it's revenues first, earnings second, and price third.
©Edward Abbott 2003