The “Iron Law” of the Stock Market

Hello. Louis Navellier here again.

In the email I sent you yesterday, I said that I’d tell you more about how my proprietary, market-crushing stock system works and the 8 attributes that the world’s biggest stock winners have.

This system has helped my readers make 1,125% in fast-growing beverage maker Hansen Natural… 457% in fast-growing energy firm Holly Corp… 430% gains in fast-growing computer chip maker NVIDIA… 211% in fast-growing medical device maker IntriCon… 477% in fast-growing computer storage firm EMC Corp… and the list goes on and on.

Getting into big stock growth winners likes these has helped my readers double and triple the market’s returns over the past 20 years.

And it’s all thanks to putting the “iron law” of the stock market to work. Remember, the iron law of the stock market says that if a company massively grows its sales and earnings grow, its stock price will, too. So finding these Breakthrough Stocks is a massively profitable enterprise.

As I mentioned yesterday, when you buy a stock, you buy a partial ownership stake in a real business.

You own a slice of that company’s equipment, inventory, patents, real estate, and brands. You become financially exposed to both the company’s upside and downside.

The major drivers of a stock’s prices are earnings (or the anticipation of them). The more a company grows its earnings, the more its shares will be worth.

Stock price trends can diverge from earnings trends for a while, but over the long-term, if a company grows — and grows the amount of cash it takes in — you can expect its share price to head higher.

And that’s why if you’re looking for stocks with massive upside potential, you should focus on the companies with massive revenue and earnings growth.

This is why my computer programs are constantly scanning the market for companies with outstanding business growth and quality.

Here are the eight fundamental factors that we study when selecting stocks:

1. Positive Earnings Revisions. I like to see stocks that have had their earnings estimates increased by Wall Street analysts. This usually tips us off to a stock that’s about to beat earnings expectations.

2. Positive Earnings Surprises. Speaking of beating earnings, I also look to see if a stock has been able to beat its earnings estimates in the past, and by how much. This is an important number to watch, because it often tells me about a stock that Wall Street isn’t paying much attention to or doesn’t yet “get.”

3. Increasing Sales. I also like to see a company that can consistently grow its sales over time. Why? Because it’s one number that is hard to fake. My background is in accounting, and I’ve always made sure to steer away from companies that use questionable accounting practices. Sales growth is a solid indicator.

4. Expanding Operating Margins. This simply tells me if earnings are growing faster than sales. A company that’s able to expand its operating margins is usually a company that has a dominant position—even a monopoly—in its industry. This company can raise prices without seeing a drop-off in sales. And that’s a nice place to be.

5. Free Cash Flow. This tells me how much money a company has leftover after paying the costs of its business. A strong cash flow is important because it allows a company to invest more resources in growing its business.

6. Earnings Growth. This is the heart of all good financial analysis. As long as any company is able to grow its earnings consistently, its stock will do well over the long term.

7. Positive Earnings Momentum. It’s not enough to see a company’s earnings grow—I also want to see it growing rapidly.

8. Return on Equity (ROE). This is the gold standard. ROE tells me how efficiently a company is managing its resources. I can’t interview every senior manager at a company, so I like to think of ROE as a report card for management.

Because of how closely we watch these fundamentals, we look forward to each and every earnings season on Wall Street. Earnings seasons cover the end of the previous quarter, typically in January, April, July and October.

These are the four most pivotal times of the year when companies report their quarterly results. Our companies typically post impressive numbers, and subsequently see a jump in stock value as a result. Right now, my Breakthrough Stocks are characterized by 30.7% average annual forecasted sales growth and 69.2% average annual forecasted earnings growth. In comparison, the S&P 500 is expected to post average sales growth of 4.1% and a 2.1% drop in earnings growth for the second quarter.

You’ll hear me mention “earnings” and “fundamentals” a lot, so pay close attention to these numbers—they’re the secret to our success.

As I mentioned yesterday, my system analyses over 4,000 stocks every day, grades them according to the individual qualities listed above, and also combines the individual metrics to create an overall composite grade for any stock.

Remember, the stocks with the highest ratings get an “A” and the worst stocks get an “F.” Just following that advice could make you a much richer investor. It’s really as simple as A-B-C!

You can see how your own stocks are doing by clicking on my Portfolio Grader. Simply enter the stock symbol, click submit and my Portfolio Grader will give you a grade. It will also give you a “Total Portfolio Grade,” as well as track the stocks you watch the most, and more.

You’ll find that some of the best growth investments are small caps. After all, every business has to start somewhere — and the highest quality ones will go on to become the next Google, Netflix or Microsoft. This is why Breakthrough Stocks focuses on these up-and-comers. Click here to learn more about how my system finds under-the-radar stocks for superior returns.

I hope you find our research interesting and very profitable! I’ll be back in touch soon, so stay tuned!

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