Growth and Forecasts
- EPS Growth
Earnings per share growth measures the rate of change in the earnings of a business. It can be forecast or rolling and is generally presented as a %. It is important to consider the basis for the earnings, eg – are management skewing earnings by capitalising certain spend that should really be opex. Similarly, if forecast, be sure to take into account the forecast method and credibility. This is one of the go-to metrics growth investors will scan when looking at future earnings potential and quick assessments of value vs growth.
Price to earnings growth is a mix of a growth and value metric. Its calculated by dividing the current P/E ratio by the forecast P/E ratio. A figure below 1 would suggest there is share price growth to come, as earnings are reported and (hopefully) the business remains rated on the same P/E ratio. This metric necessarily relies on forecasts, which we comment on briefly below. Again, this is a very common metric used by growth investors.
The most important aspect for growth is coming to a forecast view of the business’s earnings potential. For large caps, the shares are generally well covered, with BB banks and internal IR teams informing the market of earning expectations as they approach reporting. However, in the small cap space – forecasts may be rarely updated, old or indeed just absent. This can make some forecast P/E or PEG ratios meaningless or not worthy of much weight. Ultimately, its important to remember that even well intention-ed forecasts are only managements best estimates – and they can be wrong – so its important to form your own opinion on both managements ability and track record with respect to forecasting, but also the forecasts themselves.
- Moving averages
Moving averages are very easy to calculate and understand – they are a figure (generally presented as a trailing line) calculated daily / weekly / monthly that measures the stocks average price over a determined historic period (eg the 20 day moving average). They are used to give an indication that a stock is either in an uptrend (when the moving average is below the price) or vice versa. Investors often look for short term averages crossing long term averages as an indication or confirmation of an uptrend kicking off – these can be called ‘Golden Crosses’.
Relative Strength Indicator is a measure developed by J. Welles Wilder Jr in 1978. It is aiming to give an indication of the relative level of over-selling or over-buying in a stock. Typically, a reading of over 70 is considered an indication a stock is over-bought and below 30 that a stock is over-sold. It is worth noting, that in a strong uptrend the RSI can stay above 70 for a long time, and vice versa on the way down. If you’re trying to buy a stock with strong momentum, its worth noting the RSI to avoid buying at a ‘short term’ peak.
The formula for the calculation is below – it typically looks back over the prior 14 period – so the first step is essentially replicated across 14 further periods.
- Look elsewhere
Whilst we at Journal.Investments do use technical analysis on occasion – its not a specialism of ours – so we suggest if this is something that interests you, please look elsewhere.