“Stock Returns are Slave of Earnings growth”- Warren Buffet
Yesterday I was speaking to a client, and he said that fundamental’s don’t work in the market. I smiled but didn’t argue (Thank you Dale Carnegie for teaching me that). Today I am going to show you why exactly we look at companies that are expected to atleast double their EPS in 2-3 Years.
This is a 2 Part Blog, the 2nd Part will be Uploaded on Monday.
Let me First Prove that EPS Growth = Stock Returns.
“History gives all us answer’s, only if you ask”. We First found out 20 years of Sensex Returns and EPS Growth; The Results were Suprising , for the last 20 years the Sensex EPS Growth rate is equal to Sensex returns i.e. both equals to 11%.
Let’s Make sense of this Data. The Volatility of Sensex Earnings is 55% less than volatility in Sensex Returns i.e. over long periods of time market returns will exactly be equal to Long term EPS growth rate but it may differ over the short term. The correlation of 1 year returns and 1 year EPS growth is 30% i.e. its Naive to Expect that if in 2017 year earnings will be at 15%, then Sensex will give you 15%. This only means that in short term Returns and EPS Growth Rate might differ but over very long periods of time it will be same.
In fact Please read this blog if you already haven’t, it’s the most important factor for Sensex Returns in short term.
At Stallion Asset, we only buy companies that we expect will at least double their EPS in next 2-3 years with Reasonable margin of safety, and then we see if the thesis is working or no. We have beaten Market’s Consistently using this Strategy and believe me this approach will work well for the next 5 decades.
Comment Below on the Stock you believe will double its EPS in 2 years.
Come back for the Second Part of this Blog.
