Wednesday, July 30, 2008

Peter Lynch Lyrics: Earnings, Earnings, Earnings!

The following notes was taken from a forum posting. If not mistaken the original writings were posted at Wallstraits.com.


Lynch Lyrics

Earnings, Earnings, Earnings!


"What you're asking here is what makes a company valuable, and why it will be more valuable tomorrow than it is today. There are many theories, but to me, it always comes down to earnings and assets. Especially earnings. Sometimes it takes years for the stock price to catch up to a company's value, and the down periods last so long that investors begin to doubt that will ever happen. But value always wins out-- or at least in enough cases that it's worthwhile to believe it."

"Analyzing a company's stock on the basis of earnings and assets is no different from analyzing a local laundromat, drugstore, or apartment building that you might want to buy. Although it's easy to forget sometimes, a share of stock is not a lottery ticket. It's part ownership of a business. Here's another way of thinking about earnings and assets. If you were a stock, your earnings and assets would determine how much an investor would be willing to pay for a percentage of your action. Evaluating yourself as you might evaluate General Motors is an instructive exercise, and it helps you get the hang of this phase of the investigation."

"Like the earnings line, the p/e ratio is often a useful measure of whether any stock is overpriced, fairly priced, or underpriced relative to a company's money-making potential. The p/e ratio can be thought of as the number of years it will take the company to earn back the amount of your initial investment-- assuming, of course, that the company's earnings stay constant. If you but shares in a company selling at two times earnings (a p/e of 2), you will earn back your initial investment in two years, but in a company selling at 40 times earnings (a p/e of 40) it would take forty years to accomplish the same thing."

"Some bargain hunters believe in buying any and all stocks with low p/e's, but that strategy makes no sense to me. We shouldn't compare apples to oranges. What's a bargain p/e for Dow Chemical isn't necessarily the same as a bargain p/e for Wal-Mart. If you remember nothing else about p/e ratios, remember to avoid stocks with excessively high ones. You'll save yourself a lot of grief and a lot of money if you do. With few exceptions, an extremely high p/e ratio is a handicap to a stock, in the same way that extra weight in the saddle is a handicap to a racehorse."

"There are five basic ways a company can increase earnings: reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close or otherwise dispose of a losing operation. These are the factors to investigate as you develop the story. If you have an edge, this is where it's going to be most helpful."

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