Now that January is halfway gone, investors should be starting to prepare for earnings season in February. It would be good to go over last year's results to understand what has changed in the last six months. Apart from revenue and net profit, one other important thing is how the company has followed its business strategy.
This is part of the ongoing stud poker game that investing legend Peter Lynch wrote about in his famous "how to" book on investing called One Up on Wall Street.
In stud poker, the first two cards of the hand are dealt face down, then the next four are dealt face up on the table for all to see. You may see a good hand developing, but to see the next card you have to bet. You win by making the best hand out of the seven cards.
Lynch thought following a stock was similar. You read the news, business updates and annual reports and see the development. Experienced poker players only increase their stake when the odds are in their favour. Amateur players keep upping the ante hoping that the last card makes the winning hand.
Investors shouldn't bet on stocks, but they should be shrewd businesspeople. Each new development in the stock story is a new card. Is the situation ("the hand") getting better or worse? As long as it is good or getting better, it pays to stay in the stock.
Here are two attractive growth stocks I will be watching for in the upcoming earnings season for even more improvements.
— Slater & Gordon Limited (ASX: SGH) had a standout year in financial year 2014 with net profit rising from $41.9 million to $60.9 million. This resulted from the organic and acquisitive growth of its law practice network in Australia and the entry into the UK market. After the books were closed on that year, there were a number of acquisitions which followed, so the half year report will show us how those "cards" are developing. The law firm specialises in personal injury law and is a market leader in this field.
— REA Group Limited (ASX: REA) has been a fast grower for around 10 years, serving up high-double digit earnings growth with the number one property search website realestate.com.au. With a strong brand name and a very tight hold on its market, the company has definite competitive advantages which are hard for competitors to assail. Last September, REA Group entered a joint venture with media giant News Corp (NASDAQ: NWS) to acquire the third largest property search company in the US, Move, Inc. Investors will want to see how that is developing. It will be operating in a much bigger, very competitive market. I'll be looking to find out how REA Group plans to create similar success there. I still expect double-digit earnings growth in the half-year results, so investors should definitely have this stock on their watchlist.
