fundamental trends? These technical questions will affect your con-
clusions about a company’s financial strength, but they should be
used as confirming features rather than as primary trading tools.
Confirmation as a Means for Identifying
Primary Trends
How do we find the primary trend of an individual stock? That is
the key to picking stocks that are likely to grow over the long term.
Investors recognize that growth in market price is chaotic in the
short term and even the intermediate term, but that over the long
term (the stock’s primary trend), price is a reaction to earnings
strength and to the ability by the company to create and sustain a
growth trend. The primary trend involves fundamental changes—
sales, profits, financial strength—rather than market price, so fun-
damental analysis is the key to identifying the primary trend. If we
wish to define a “fundamental primary trend,” we should include in
that definition the basic indicators we wish to use: sales, earnings per
share, trends in working capital and in capitalization, and any other
financial features that confirm what these trends indicate.
We are concerned with confirmation on two levels. First is the
overall trend itself; we seek confirmation of the long-term growth
trend. Second is confirmation of specific fundamental indicators,
which is discussed in the next section of this chapter.
The first concern—the primary trend of the company’s long-
term growth—is a starting point in our analysis. Will the apparent
direction of growth that we see today continue over time? Is a pos-
itive trend likely to remain so, or is a negative trend an indication of
permanent capital weakness (versus a temporary problem)? Will
sales growth and consistency in earnings continue, and if so, for
98
STOCK PROFITS:GETTING TO THE CORE
how long? When will sales and profits begin to level off, and why?
To what degree will economic conditions affect this primary trend?
Since some stocks are more sensitive to the economy and others less
so, this is a variable that has to be taken into account in judging and
confirming a primary growth trend. The signs of whether growth is
sustainable are difficult to spot in the review of any single trend,
and this is where long-term growth predictions benefit from the
process of confirmation.
Key Point: The primary trend in a stock’s price is usually
easily recognized: growth or decline in sales and profits often
is the most obvious starting point. However, it is just that—
a starting point.
Example: Motorola (http://www.motorola.com) reported a de-
cline in sales and earnings in the three-year period from 2000
through 2002 (in $ mil):
99
CHAPTER 4•CONFIRMATION
Year 2000 2001 2002
Net sales 37,346 29,873 26,679
Net earnings (loss) (1,318) (3,937) (2,485)
Although the trend is negative (even before taking core earnings
into account), we could assume that this decline is cyclical and that
the blame is with the economy. This period was characterized by
economic weakness overall, so that initial assumption may seem re-
alistic; the downturn began in 1999 and continued throughout the
three years in question. So, in order to judge whether Motorola’s
growth prospects are strong or whether this decline is a more per-
manent trend, we look for confirmation in other, related trends.
In studying Motorola’s capitalization over the same period, we dis-
cover that the debt ratio (percentage of long-term debt to total long-
term debt and stockholder’s equity) grew during this period as well:
This trend is summarized in Figure 4.1
The year 1999 was included to demonstrate that the ratio in
2000 was not itself an aberration. This trend shows that Motorola
made a dramatic shift in the last two years reported, more than dou-
bling its dependence on debt capitalization. The long-term debt and
stockholders’ equity for the same periods are as follows:
100
STOCK PROFITS:GETTING TO THE CORE
Year Ratio (%)
1999 14.2
2000 18.7
2001 37.9
2002 39.0
P
E
R
C
E
N
T
A
G
E
1999 2000 2001 2002
40
38
36
34
32
30
28
26
24
22
20
18
16
14
Figure 4.1 Motorola, debt ratio.

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