First Impressions: Steady And Consistent EPS

Includes: F, KO
by: Dustin Allen

"You never get a second chance to make a first impression."

There is no exception to this rule when it comes to investing in companies.

When searching for possible investment opportunities I use several tools to narrow down likely candidates. First, I use a stock screen that is an adaptation of the 7 criteria set forth by Graham in The Intelligent Investor. Once I have established a list of companies that have meet the criteria, I begin to look a little closer. This is where I formulate my first impression of a business.

Steady and Consistent

As I winnow through the list of companies, I enter each of them into a spread sheet and I am met with a graphical display of the company's Earnings per Share or EPS from the last decade, like the one below:

Or, sometimes I may see one like this:

I have not disclosed the names of the companies yet, so as not to prejudice your impressions.

Graham calls for the defensive investor to require "Some earnings for the common stock in each of the past ten years." By itself this may not be too restrictive of a criterion, but when combined with the other attributes from the screen it becomes more difficult.

Especially when you consider the difficulties companies have faced since 2008. That time period alone culls many companies that were not able to stand up to the economic turmoil. In fact, I think it is a great reference for Value/Fundamental investors to have such a time period to hold as a measuring stick for companies.

If a company shows any negative earnings in the last ten year time period the impression has been made. I will move on to the next one on the list.

Conversely, if the company has been positive for ten years, I now look at the trend line. A steady upward trend makes for predictable earnings and growth.

Too Much Defense?

This may seem harsh and too restrictive for most investors. I will be hones:; I need all the margin for error I can get. If that means passing on a company that has had a down year or two, so be it. I would rather be really right once than sort of right twice.

You enterprising investors need not despair; Graham has left an out for you. When it comes to stock selection for the enterprising investor Graham calls for "No deficit in the last five years." This will open up the field quite a bit.


Am I being too restrictive?

What do you use as a first impression when it comes to stock analysis?

Oh yeah, the companies above: Coca-Cola (NYSE:KO) and Ford (NYSE:F).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.