followed each year. Of course, earnings serve as one of the primary
indicators, and the Wall Street obsession on earnings is well known.
The predictions made by analysts about quarterly earnings per share
are followed carefully by “the street” as a most important meas-
urement of corporate performance. In fact, the analyst’s prediction
(and how close actual EPS comes through) often is viewed as more
important than longer term growth prospects—at least to the ex-
tent that the accuracy of those predictions is factored into stock
At the point that the analyst’s prediction becomes a primary in-
dicator of “good” or “bad” results, the fundamental significance of
earnings has already been lost. This crossover from fundamental to
technical is dangerous. Even the most serious fundamental analyst
can easily be distracted by short-term reaction to earnings predictions
and may easily lose sight of more important trends.
Without making core earnings adjustments, the apparently
strong EPS of a company could be far weaker than it first appears.
In many instances, core earnings adjustments drastically reduce EPS
and may even change a reported profit to a net loss. Of course, core
earnings are the isolated earnings from operations, so one argument
could be made that the corporation in question did, in fact, earn the
reported profits. However, with the long term in mind, it is equally
valid to recognize that nonoperational profits are not going to recur
year after year and that the exclusion of items such as employee
stock options makes reported profits inaccurate. So, core earnings
adjustments are not merely theoretical for the fundamental investor.
These adjustments can serve as the basis for realistic analysis and not
merely as an alternative way to look at the numbers.
Is there a conflict between fundamental and technical? Of course.
If you decide to watch price trends without also identifying what is
going on in the fundamentals, then this limits your information. If
a corporation is not making core earnings adjustments voluntarily,
STOCK PROFITS:GETTING TO THE CORE