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
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
STOCK PROFITS:GETTING TO THE CORE