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

Conclusion

Firms that report a steady and stable stream of positive earnings per share are considered by some investors to be good investments because they are safe. Both the theoretical backing and the empirical evidence for this proposition are weak. Firms that pay a large price (on risk management products or acquisitions) to reduce or eliminate risk that investors could have diversified away at no cost are doing a disservice to their stockholders. Stable earnings notwithstanding, you should not expect these firms to be great investments. In this chapter, we considered this issue by first looking at how best to measure earnings volatility. When you construct a portfolio of stocks that have the most stable earnings, other problems show up. The first is that some of these firms, despite their earnings stability, have high stock price volatility and seem risky. The second is that a substantial number of these firms have low or negative growth rates. Finally, many of the remaining firms trade at high PE ratios and do not seem to be bargains at prevailing prices.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


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