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Originally Posted by Woody
Greg,
Thanks for the explanation. That does answer part of my question.
But I would also like to know how you look at other stocks such as MCD or JNJ, etc. For example, if next year their revenues and/or EPS declined from this years figures, does that put you on alert that it may be time to put your money elsewhere. Or is a one year hiccup in revenues/earnings alright. I guess I am looking for some guidance on when to get out of a stock that you are holding.
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Well... like most of these answers - it depends. What caused the earnings miss? Bad product - bad weather - a recession - or crappy management... (i.e., not controlling costs and or inventory).
So it depends on what reason is given for the earnings miss... if it's crappy management or bad product -- I'm hitting the sell button.... if it's a hiccup beyond the companies control - or some temporary setback -- I might buy more!
So it's really the QUALITY of the earnings. Sometimes a company will report real good earnings and you wake up thinking you're the hot stock picker of the decade and you look at the stock and it's sold off?!?!?! IT might be the quality of the earnings - because sales might have slipped or EPS might be the result of an insurance claim or a law suit settlement (where they received a payment that isn't a recurring item). So the "numbers" might look good on the surface but they really aren't once you get out the magnifying glass.
This is where the quality of the management is what is most important - because if they're good managers they'll correct the mistake and carry on... and this created a "buying opportunity" rather than a sell sign.
That's why I hammer that long term chart... 5 and 10 years out... steadily climbing. It's not bullet proof but it's a good indicator. It's also why I say -- if you're a relatively small investor - stick to companies you know... that way if you keep your head on - you might see the problems BEFORE they hit the bottom line. The day I go to the mall and there's nobody lined up at the Apple store - I'm coming straight home and hitting SELL!
