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Dear Investment U Reader,
 It was a hard week for investors. Stocks dipped. Gold flatlined. And oil plunged. It wasn't easy to make money.
In weeks like this, we turn to one of our most useful idioms: Smart investors have plans... wise investors have principles.
When stocks are rip-roarin' forward, it's easy to make money. The value of everything rises.
But when the indexes refuse to budge and so many stocks get stubborn, that's when the smart investor's "plans" fail, and the wise investor becomes the wealthy investor.
As the educational arm of The Oxford Club, this is when Investment U shines. The traffic to our site increases... our e-letter is shared by more readers... and our mailbag fills with questions from concerned investors.
It's because of the Club's proven principles. When the seas get rough, they act as an anchor to keep us from going adrift.
 | | This week: Steve McDonald reveals a secret that even Victoria can't keep. |
One mainstay principle is remembering that stock prices follow earnings. It's one of the simplest of ideas. But when wild-eyed investors are riding a bull market, it's something they rarely stop to ponder.
It's imperative that you understand this key principle. So today, we'll take some time to study it.
First, I want to introduce you to a brand-new feature on the Investment U website. It's a free mini-course that focuses entirely on fundamental analysis (including the idea touted in the article below). Feel free to send the link to a friend.
With our recent acquisition of one of the industry's top online financial educators, we are excited to soon publish more of these courses on a variety of topics.
And for this week's featured "lecture," we turn to a classic column penned by Alexander Green. Although it was originally published nearly a year ago, the stock screen he discusses is just as powerful today as it was then.
It's more proof that with a principled approach, fear can lead to opportunity.
Good investing,
Andrew Snyder
Editorial Director, The Oxford Club
P.S. The Dow and the S&P 500 may have lost some ground this week, but we urge you to take a look at an entirely new index. It's flat-out crushing the market. Click here for the full scoop.
The Stock Screen That Created a Billionaire Alexander Green, Chief Investment Strategist, The Oxford Club
Originally published on November 26, 2013
When I recommend stocks to my readers, I spend a lot of time talking about earnings.
That's no great surprise. There are few things as important to an equity investor as the net profits of a business - and where they are headed.
But there is another measure that is equally important: sales growth.
Anyone who has run a business knows that you can increase profits for a while simply by cutting costs. But there are limits. After a while, you just can't cut costs further without eroding the underlying business.
So sustained bottom-line growth demands robust top-line growth.
Here's an example...
A few weeks ago, I recommended Chicago Bridge & Iron (NYSE: CBI) to my Momentum Alert subscribers. It is a complete energy-infrastructure firm. It offers design, engineering, construction, fabrication, maintenance and environmental services worldwide.
Recently, the company knocked it out of the park when it reported that third quarter earnings per share rose 47%. But the real eye-opener was sales growth, up 107%. Chicago Bridge picked up $2.5 billion in new project orders in the third quarter alone.
Sales growth like this generally precedes outstanding profit growth. Of course, you can overpay for sales just like you can overpay for earnings.
Understanding Price-to-Sales
In his 1984 book Super Stocks, money manager and Forbes columnist Ken Fisher said his primary stock-picking tool was the price-to-sales ratio. He argued that stocks that sell for 1.5 times sales or less are often good values - and those that sell for 0.75 times sales or less can be incredible bargains. Chicago Bridge, for example, sells for 0.85 times sales.
If you're searching for stocks that sell even cheaper than this, be prepared to look at companies that are completely out of favor.
[Editor's note: As of October 3, a few examples include Rite Aid (NYSE: RAD), 41% of sales; Ruby Tuesday (NYSE: RT), 30% of sales; and Barnes & Noble (NYSE: BKS), 18% of sales.]
How has this approach worked out for Fisher? Not bad. His $42 billion registered investment advisory is one of the world's biggest. And his $2.3 billion personal net worth puts him in good company: the Forbes 400.
Clearly, Fisher has gathered a lot of assets using his price-to-sales approach. It's an approach worth emulating.
Good investing,
Alex
To access the Investment U archives, please visit InvestmentU.com.
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Further Reading:
The Time to Act Timing. It's crucial... yet overrated.
If Herbert Hoover had been elected president after the market crash of 1929, instead of a few months before it, he might be remembered the way FDR is, instead of as one of history's most ignominious flops.
If Napoleon had gotten his troops out of Moscow just a little sooner, he might have been a step ahead of the harsh Russian winter and returned to France with more than one-tenth the force he started with.
And if I had bought Chipotle (NYSE: CMG) the first time I stood in a 30-minute line for a burrito, I might be writing you from my beach house in Costa Rica.
Thus, Matthew Carr's essay on Thursday hit home. He noted that we're on the cusp of a massive cultural, demographic and economic revolution. The time to act is now, he said (citing Chipotle, among others). David Fessler reported on Wednesday about the company that's first in line to get approval for a liquefied natural gas exportation plant - the first of many. Perfect timing - and shares are exploding.
And when Chris Rowe updated us on his strategy of buying the hottest sectors, he let us know which sectors are likely to surge next.
But we know there's a dark side to this focus on timing. It's one thing to strike while the iron's hot. But trying to time your jumps into and out of the market at just the right moments is an expensive, silly game. Alex Green has had much to say on that subject - and will have more to say this week.
Last week, he reminded us that while the pursuit of wealth is honorable, the attainment of riches is not the end of one's problems - and in fact, it creates new ones. And he told us that struggling investors suffer not from a lack of intelligence but from an abundance of bad information.
To ensure that you're getting the right information before investing, we created our own Fundamental Factor Test. This week, we looked at Tekmira Pharmaceuticals' 23% jump in shares after the U.S. Ebola case. Its score may surprise you.
- Bob Keaveney with Rachel Gearhart | |
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