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Saturday, July 25, 2009

There are earnings and then there are earnings

“The broad stock market,” writes Dan Amoss, “doesn’t see a difference between earnings achieved by cost cutting and earnings achieved by sales growth -- especially in the consumer discretionary sector. Earnings achieved by cost cutting tend to be one-time in nature. These do not deserve higher multiples. The latter -- earnings driven by sales growth -- certainly merits higher multiples. We have seen very little of this, outside of unique companies like Apple.

“This is very important to keep in mind, because the rally in the market since the March lows is entirely driven by expansion in price-to-earnings multiples, not growth in earnings.
-- from "Recession Forecasts, 8 Signs for When The Worst is Over, The Booming Loonie and More!" by Addison Wiggin and Ian Mathias

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