Equity Per Share vs Earnings Per Share(EPS)

2009-11-16T08:38:00.000-08:00

To be able to understand what I am really after in stock trading I ask myself what I really want to see. I like momentum and I like retracements. I am interested in mostly growth stock. I think most traders care about earnings growth way too much instead of equity per share growth which stock's value is backed up with. My reasons to care more about equity per share growth vs EPS are:
1-Earnings can show triple digit growth yet it may have insignificant impact on valuation. For example for a stock trading at $50 with a breakdown of valuation, say $20 book value and $30 future earnings(premium or expectations). Last annual earnings per share $.20 and this annual year is $.60 reporting a 200% EPS growth rate however it will increase equity per share only by 2%. Calculation goes like $.60-$.2=$0.40 net earning increase from last year to this year. $0.40/$20(current equity on one share)=2%. Judging that 10 year bonds pay around risk free 4% with lot less volatility risk this share is not a good buy.
I look for stock with minimum 100% equity per share growth with annualized compound rate over 3 years and sustained quarterly year over year growth rate from last quarter in last year to last quarter to this year. In our example stock which has already $20 equity on it as given above. To be able to sustain 100% increase in its equity company needs to come up with $20 of earnings. Every time I search these stocks I come up with most aggressively trending stocks in price action.
I also pick the ones which do not pay dividend. I just don't want to pay extra dividend premium and my holding period is not compatible with any dividend strategy. Whenever a company pays out dividend that company may not quite match growth stock criteria as growth companies are cash hungry entities with lots of projects in pipeline expected to be financed with debt or equity. So I skip companies paying dividends even though it is a small amount. I don't like my company to be bleeding in value and gets heavier in price action.
I also look for minimum two institutional interest in equity. This means that institutionals would increase their positions causing larger price moves as company releases better results. Why two institutions? Because it is less random than one. Three is even better.
It is also a must to watch stock's at least six months of relative performance compared to S&P500. When I first read about relative strength I asked myself "Why would anyone be interested in buying anything which has already taken off?". Answer was in front of my eyes. Wall Street saying "cheap stocks gets cheaper..!" was true unless discovered. I wouldn't buy a gold mine of which reserves has not been proved. I'd like to first see guaranteed certificate that there will be minimum X amount of gold in the mine then I'll talk the price. Same in stocks as a retail trader I don't have the luxury to buy a stock because it is cheap or 30% off its 52 week high or trading in extremely low multiples. I'd like big boys put out their show first, I can always find my 3:1 risk reward ratio trader on its way up. Growth stocks should give me good upside. A forgiving distance and momentum so first it will not retrace back hard enough to test my stop, second, it will not stop somewhere between my stop and profit target due to tight and disagreed valuation.
Last it is important to watch revenue growth as well. Strong revenue growth means output of company is finding high demand which should support earnings and equity growth. If company's net margin ratio has not changed but earnings are flying through the roof may mean company is not extracting those profits from sales instead they cost-cutting. Single or some cases even double digit revenue growth may not sustain triple digit earnings growth for a long time. Idea here is to find a company growing its equity with fastest rate with smallest net margin rate so our company has big advantage and flexibility to increase their net margin when they need to. After spotting good growth companies it is always good to have a look at the sector to see what's the going net margin rate like. If our company has relatively lower margin it means that there is still room to boost earnings without needing much revenue growth. However I always look for companies with minimum revenue growth rate 1/5 of equity growth rate. For example 100% annualized compounded 3 years equity growth rate could be sustained more likely with 20% revenue growth than say 5% revenue growth. Bigger is better of course so company will be able to cut down net margin if tehy need to giving them the competitive edge. How much sales is the best? I try not to look for companies with less than $100k sales-per-employee. It is not an ultimate measure and most of the time it only makes sense to compare it with peers but efficiency is key and this is the ratio of big boys and long term gurus. It wouldn't hurt to have a look. That's all for now. Thanks for reading.

CalmBear Journal

Equity Per Share vs Earnings Per Share(EPS)