Conscious Investor: Wizard
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FAQ:   Below are answers to the most commonly asked questions about companies with stable growth.

Q What does this site do?
A This site allows investors to choose companies that have the highest stability in the growth rate of their earnings for the past five years. It also displays the current price, the market cap and the historical growth rate of earnings for the companies with high stability.

Q How is the stability measured?
A It is measured by a proprietary function called staegr (pronounced "stay-ger"). Staegr™® was developed by and is trademarked to Professor John Price. A staegr of 100% indicates that the historical data is changing by exactly the same amount each year. For example, the data might be growing by 10% per year or decreasing by 5% per year. When the data is less stable, then the staegr is lower.

For the technically minded, the calculations are based on fitting an exponential curve to the historical data with more emphasis placed on the stability of the growth of recent earnings. Special adjustments are made for negative earnings, for extreme outliers, and for earnings near zero.

Further analysis and information regarding Staegr can be found by clicking here.

Q Why do you want to measure the stability of earnings?
A It is vital to have confidence in the growth rate of earnings. As Peter Lynch, the author of One Up On Wall Street said, "Earnings, earnings, earnings ... ultimately the earnings will decide the fate of a stock."

This is because the growth in price of a stock over the medium to long term is highly dependent on the growth of its earnings per share (eps). Without this confidence in the rate of growth, any stock purchase is a speculation.

Dr. Price has carried out extensive studies showing that if a company has high stability in the growth of historical earnings, then we can use past growth rate to forecast the future growth rate. Using stability as a filter, analyst forecasts can be improved by a factor of 5 or more.

As investors we need to look for companies that have had earnings with growth that is both strong and stable. In other words, we want companies with high hgrowth and high staegr.

Q How do you measure growth rate?
A Growth rate is measured by another proprietary function called hgrowth™. This function takes into account all the data and not just the data for the first and least years.

Q Can you give me examples of low stability and high stability companies?
A An example of a low stability business is Ford Motor Company. The chart on the right shows the eps for the past 7 years. Over this period the eps has ranged from -$6.72 to +$2.30 without any pattern. Clearly any forecasts of earnings for this company in the future would really only be guesses.

The staegr for this period is a low 15.26% out of a maximum of 100%. It is the sort of company that would immediately be filtered out with Conscious Investor.

This is not to say that if you purchased shares in Ford today, you would not make money. However, it would be a stressful gamble, not an investment.

In contrast, consider the chart on the right showing the eps for Walgreen, the retail drugstore chain. Like clockwork the eps have grown by 15-16% year after year. In this case the staegr is 98.04% over the past 10 years.

This stable growth is an outcome of the fact that Walgreen runs 5,461 stores located in 47 states and Puerto Rico. Last financial year it opened or acquired 570 stores after relocations and closings.

What about the future? Charts like the one on the right give confidence about the future growth of the company. This is supported by a recent statement by the company that aggressive growth will continue and the company anticipates operating more than 7,000 stores by 2010.

As the earnings grow in this stable way year after year, then the price follows along. An investment of $10,000 in Walgreen 10 years ago would now be worth $49,357.18, almost a 500% rise.

The key point is that when you can be confident about earnings growth, you are in control. It is stress-free investing at its best. This is why Warren Buffett looks for companies for which he can be very confident about the growth of their earnings.

Q Can you give me examples of low stability and high stability companies in Australia?

A Every market has companies with unstable growth and with stable growth. The important strategy is to have a method of allowing you to zoom in on the companies with the highest stability.

The example on the right shows the EPS for iiNet, an internet service provider. It has a staegr of 25.9%. Even when removing the recent loss, its staegr is still only 28.3%.

Earnings for companies such as this are impossible to forecast with any confidence.

In contrast, consider the chart on the right of eps for Woolworths, Australia's largest and most successful retailer. Every year eps have grown by 16-17%. This is a particularly high growth given that it pays around 65-70% of its eps as dividends. Woolworths has a staegr of 95.8% for the past 10 years out of a maximum of 100%.

An investment of $10,000 in Woolworths 10 years ago would now be worth $96,155.77, almost a 10-fold return.

Q OK, I understand the importance of stability and growth of earnings as measured by staegr and hgrowth. What about the stability and growth of sales?
A The stability and growth of sales are also important. This is because if sales are growing significantly slower than earnings, they act as a drag on the growth rate of earnings. In the opposite direction, if sales are growing significantly faster than earnings it may indicate that the company is having difficulty with margins and profitability.

So, unless sales and earnings are growing at approximately the same rate, we need to make adjustments to any forecasts.

Q I want to measure the stability and growth of earnings for other companies. How can I do this?
A The investment system called Conscious Investor allows you to measure the stability and growth of both earnings and sales over different time periods for thousands of US, Canadian and Australian companies. It also allows you to screen these companies using these and other key measures.

Trademarks The following trademarks are licensed for use on this site. Conscious Investor® is a registered trademark in the US and Australia. Staegr™® and hgrowth™® are trademarks in the US and registered trademarks in Australia. Eforecast™ is a trademark. You may only use these marks with proper attribution.

Staegr, hgrowth and eforecast were developed and coded by Dr. John Price.