What is probably THE most important thing to look for in a stock?
If you set before me a list of 10 stocks and asked me to pick out the best, automatically I would make a beeline to company earnings to start the sorting. Regardless of the industry, earnings and earnings growth tell the story of how much of a return I can expect for my money.
Earnings show how successful a company could be. Earnings also set the price of shares. Change the earnings per share or the expected future earnings by even one cent and the market will adjust the share price. The price/earnings ratio illustrates that relationship to a tee. In the end, earnings growth usually drives share price as well as dividend payment increases.
Earnings growth: Ramsay Health Care VS BHP Billiton
Look back over the past five or ten years (the longer the better) to see if earnings per share (EPS) have risen steadily. Ideally, you don't want to see any sudden drops or net losses, but even the best companies have bad years. Ramsay Health Care Limited (ASX: RHC), Australia's largest private hospital operator has a remarkable track record. It has raised EPS over five times in ten years.
Now, take a look at mining giant BHP Billiton Limited (ASX: BHP). Earnings per share are up and down. BHP is in the cyclical mining industry, so you are going to have big earnings swings as commodity prices rise and fall. Recently, they have been falling across the board – iron ore, coal and even oil. Healthcare is not cyclical since the demand for medical care is about the same all the time and larger populations mean more sick and injured people.
EPS for BHP over the 10 years only doubled. Long-term shareholders made money, but nowhere near the share price gains from Ramsay Health Care. From March 2005 to now, BHP stock rose about 60%, whereas Ramsay Health Care is up almost 800%!
Source: Google Finance
How will they rise in the future? I can't predict, but I would lean toward Ramsay as being a better performer. I would choose Ramsay Health Care over BHP Billiton hands down. The hospital operator is expanding overseas in Europe and Asia, so it can replicate its growth model there as well.
