Earnings Reliability and Total Returns (II)
Does higher earnings reliability lead to higher returns? For evidence to begin to answer this question, I went back to the Dow earnings data and generated a scatter plot against total returns over the same period of time, 1995-2004. Unfortunately, I don't know how to upload graphs to this blog; so, a simple numerical table will have to suffice:
Tables show:
Dow component: Earnings reliability vs. total return (annual)
Companies with HIGHEST earnings reliability:
Home Depot (HD): 2.39 vs. 18%
General Electric (GE): 2.38 vs. 17%
Wal-Mart (WMT): 2.23 vs. 21%
Companies with LOWEST earnings reliability:
Boeing (BA): -0.27 vs. 4%
Honeywell (HON): -0.31 vs. 6%
Hewlett-Packard (HPQ): -0.47 vs. 8%
Among the remaining 24 Dow components:
Companies with HIGHEST total returns:
Citigroup (C): 0.70 vs. 23%
United Technol. (UTX): 0.53 vs. 22%
Microsoft (MSFT): 0.76 vs. 20%
Companies with LOWEST total returns:
General Motors (GM): 0.23 vs. 3%
Coca-Cola (KO): 0.28 vs. 3%
Merck (MRK): 1.11 vs. 3%
Observations:
1. Companies with the highest earnings reliability (HD, GE, WMT) produced among the highest total returns (average = 19%) over the past 10 years. By comparison, companies with the lowest earnings reliability (BA, HON, HPQ) had considerably lower total returns (average = 6%);
2. The remaining 24 companies, which sit in the central "cloud" of the scatter plot, also show the same correlation: Companies with the highest returns (C, UTX, MSFT) had, on average, higher earnings reliability than companies with the lowest returns (GM, KO, MRK).
The full scatter plot of all 30 Dow components has an r-squared coefficient of 0.24, giving us some confidence that, as expected, higher earnings reliability is generally correlated with higher total returns.
Conclusion: To the extent that companies with consistent earnings in the past continue to post consistent earnings in the future, we should give serious consideration to companies with high earnings reliability as we search for higher returns.
Tables show:
Dow component: Earnings reliability vs. total return (annual)
Companies with HIGHEST earnings reliability:
Home Depot (HD): 2.39 vs. 18%
General Electric (GE): 2.38 vs. 17%
Wal-Mart (WMT): 2.23 vs. 21%
Companies with LOWEST earnings reliability:
Boeing (BA): -0.27 vs. 4%
Honeywell (HON): -0.31 vs. 6%
Hewlett-Packard (HPQ): -0.47 vs. 8%
Among the remaining 24 Dow components:
Companies with HIGHEST total returns:
Citigroup (C): 0.70 vs. 23%
United Technol. (UTX): 0.53 vs. 22%
Microsoft (MSFT): 0.76 vs. 20%
Companies with LOWEST total returns:
General Motors (GM): 0.23 vs. 3%
Coca-Cola (KO): 0.28 vs. 3%
Merck (MRK): 1.11 vs. 3%
Observations:
1. Companies with the highest earnings reliability (HD, GE, WMT) produced among the highest total returns (average = 19%) over the past 10 years. By comparison, companies with the lowest earnings reliability (BA, HON, HPQ) had considerably lower total returns (average = 6%);
2. The remaining 24 companies, which sit in the central "cloud" of the scatter plot, also show the same correlation: Companies with the highest returns (C, UTX, MSFT) had, on average, higher earnings reliability than companies with the lowest returns (GM, KO, MRK).
The full scatter plot of all 30 Dow components has an r-squared coefficient of 0.24, giving us some confidence that, as expected, higher earnings reliability is generally correlated with higher total returns.
Conclusion: To the extent that companies with consistent earnings in the past continue to post consistent earnings in the future, we should give serious consideration to companies with high earnings reliability as we search for higher returns.
posted by Lloyd Sakazaki at 4:11 PM
2 Comments:
I have a web site where I give advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about the future of the stock market theirs always bargains in the stock market you just have to be willing to take the time to find them. I recently sold my shares in vonage holdings corporation for 5 dollars. I bought the shares in 2009 for 37 cents. This was a rare exception to the general rule most of the stocks trading under 1 dollar are not good investments. The way that you find low priced stocks that are worthy investments is to have as much knowledge and experience as possible about these type of securities. Only than can you profit tremendously from these stocks.
Hello everyone, Are you looking for a professional trader, cryptocurrency/forex and binary manager who will help you trade and manager your account with good and massive amount of profit in return. you can contact Mr. Bernie for your investment plan, for he helped me earned $8,600 usd with little investment of $850 usd. Mr Bernie Doran you're the best trader I can recommend for anyone who wants to invest and trade with a genuine trader, he also helps in recovery of loss funds..you can contact him on his whatsapp: +1(424)285-0682 Email:(berniedoransignals@gmail.com)I advice you shouldn't hesitate He's great.
Post a Comment
<< Home