• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint

More to the Story

Are stable earnings companies safer investments and, more importantly, better investments than companies with more volatile earnings? To answer these questions, you need to consider four potential weaknesses in a stable earnings company strategy. The first is that companies with stable earnings can still be volatile investments. The second is that companies with stable earnings may offer little growth potential, thus creating a tradeoff between stable earnings and high growth. The third is that companies might use accounting games to make their earnings look more stable. The fourth is that stable earnings companies may be priced right and provide little opportunity for high returns.

Stable Earnings, Risky Investment?

A company with stable earnings may not necessarily represent a stable investment, because stock prices are affected by far more than earnings news from the company. Nonearnings news about growth prospects and management changes, macroeconomic news about interest rates and economic growth, and information released by competitors in the same business can all cause stock prices to move even when earnings do not. An investor ultimately measures risk on the basis of stock price movement, and a stock with stable earnings and a volatile price path would still be categorized as risky.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint