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When I’m looking for stocks to buy, there is one thing that I think is more important than anything else right now. And that something is growth.
A company’s ability to grow its earnings per share (EPS) is something investors should always consider. But I think it’s the most important thing for investors to think about right now.
Share prices
There are two main reasons why a company’s share price might rise. One is for the company to make more money and the other is for investors to be willing to pay a higher multiple for its earnings.
Carry Apple as an example. Over the past five years, the company’s share price has increased 247%.
One of the reasons for this is that the company has increased its profits. Apple’s earnings have gone from $2.98 per share in 2018 to $6.11 now.
However, that represents about 105% of the increase. The rest comes from investors who are willing to pay more for the company’s profits.
Five years ago, the stock was trading at a price-to-earnings (P/E) ratio of around 17. Today, that ratio is closer to 30.
In other words, Apple’s share price has benefited from a double tailwind of business growth, while investors have been willing to pay higher multiples for the company’s earnings. But I don’t think this is sustainable.
Interest rates
For the past five years, interest rates have been low. This has meant that investors have been unable to earn a decent return on cash and bonds.
Consequently, they have been willing to pay higher multiples for the stock, causing prices to rise. But the outlook for the next five years is quite different from the last five years.
Interest rates have increased in both the United States and the United Kingdom. And as a result, the steady rise in price-earnings ratios has already begun to slow.
Since rates began to rise in early 2022, Apple shares have gone from trading with a P/E ratio of 32 to 29. Additionally, both the Bank of England and the US Federal Reserve are indicating that rates They will stay high.
As a result, I don’t think multiples are going to expand in the future as they have in the past. Therefore, the main force driving up share prices in the coming years will be earnings growth.
Therefore, I look to buy stocks of companies that can make more money in the future than they do today. Looking to the future, the capacity for growth is going to be, in my opinion, the most important thing.
<h2 class="wp-block-heading" id="h-buying-stocks“>Buy actions
There are several ways for a company to increase its profits. And different companies will seek to achieve this in different ways.
Something like Diploma, will aim to increase their income. All things being equal, increased sales should translate into higher earnings per share.
Others, like right movement, they are likely to use share buybacks to reduce the number of shares outstanding. With fewer shares outstanding, EPS should increase even if the company’s overall earnings remain flat.
I’m not worried about how a particular company makes it possible. But I’m convinced that potential earnings growth is the most important thing for investors looking for stocks to buy right now.
