Right now, it's interesting to watch the financial news commentators looking for signs of whether this is the start of a bear market. The talking heads on TV are certainly getting a lot of air time to explain why oil is down, gold is down, stocks are down – everything's down.
Do you want to know the best indicator for rising stocks?
Earnings.
That's why Cochlear Limited (ASX: COH) shareholders are saying, "Sell off? What sell-off?" Here's why:
New products driving sales
Cochlear's sales suffered previously in latter FY 2013 and the first half of FY 2014 because its highly anticipated hearing aids and bionic Cochlear implants were held up by regulatory approval and manufacturing issues. Now, that is behind the company.
These products of the world's leading implant producer had great pent-up demand, which finally surged through into sales once they were released. Already, there was an 18% increase in sales in the second half of FY 2014. In the first quarter of FY 2015, wireless accessories to its implant products received approvals for release in the U.S. and Australia, so sales growth is expected to rise further.
Rising share price
The sales and earnings improvement is directly feeding back into the share price. Up 24.3% over the past six months, the stock is less than 3% away from setting a new 52-week high. While the S&P/ASX 200 Index (ASX: XJO) (Index: ^XJO) is down about 3% over the past month, Cochlear is up around 6.5%.
Earnings expectations
The company outlook is now great because the delay for product launches is pretty much over and it can get back to business. Regularly, Cochlear generates a high net profit margin from its specialised products, so that premium plus expanded product demand should do wonders for FY 2015 earnings. Some analysts forecast average earnings growth of about 35% annually over the next two years. That explains the 37 price-earnings multiple being paid for the shares. That may put off value investors, but for growth at a reasonable price (GARP) it isn't bad when the price-earnings to growth (PEG) ratio is very near 1.
I think the accelerated sales volume and high product demand will be effective in warding off a market funk. If Cochlear does get pulled down because of a wider sell-off, then all the better! It's the earnings that matter.
Like Warren Buffett said:
"In investing, just as in baseball, to put runs on the scoreboard, one must watch the playing field, not the scoreboard."
