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Alternative Market Briefing

Comment: Earnings mislead investors in quest for growth

Monday, February 27, 2017

Matthias Knab, Opalesque:

AB (AllianceBernstein L.P.) writes on Harvest Exchange:

As earnings season rumbles on, analysts remain fixated on the bottom line of company reports. But earnings tell only a partial story. There's a better way to identify businesses that can generate long-term growth.

Just look at the news headlines and it's clear that earnings are what matters most for many investors. "Time Warner earnings beat expectations." "Whole Foods slides after missing on earnings." "Coca-Cola earnings retreat 5%."

ARE EARNINGS THE BEST BAROMETER?

Yet earnings might not really be the best barometer to gauge a company's true economic prospects. Earnings can't tell you how skillfully a management team deploys capital. They offer no insight into the quality of a company's profit streams. And earnings alone can't really identify companies that can generate long-term value for shareholders, in our view.

Fundamental returns "which are a way of looking at business profitability" are much more insightful. By putting returns on invested capital (ROIC) or return on assets (ROA) at the center of company research, we believe investors can discover whether a company is investing intelligently to generate its profits. That's why US stocks with high ROA have consistently outperformed stocks with high earnings......................

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