So far now, into the middle innings of the 1st quarter’s earnings reporting season, corporate profitability is rising. With 35% of the Standard & Poor’s 500 stocks reporting, total reported profits are running 11.6% above the comparable period last year (Jan. – Mar. ’05). Moreso, two-thirds of reports are better than the current estimates by stock analysts.
However, troubling in this rush of earnings reports are the number of earnings restatements the past year by the bean counters (accountants, CFO’s and the like). The latest data from 2005 shows 1,000 corporate restatements vs. 500 for 2004. Huge corporations, General Motors and Federal National Mortgage have restated. Even H&R Block, which should ‘get it right’ restated ’04 and ’05 results.
What to make of all this? Well, as investors we need exercise due diligence, watching the news and stock charts very carefully. An investment manager friend of mine stated that the best companies to own are those that you never have to sell. That’s a goal, but I think it’s unachievable for the most part. Leaders prosper and then often fail. New technologies create new industries and displace others – or put them out of business entirely. Growth stocks owned in your 30s may be too volatile and provide little or no income when you’re 60 or older and retiring. I personally know of investors, friends and clients that have lost big, in well-known companies such as Lucent Technologies, Worldcom and Enron. Even IBM, the bluest of blue chips fell from $175 to $40 in the 1990’s as their fortunes temporarily turned sour. Luckily, I did not recommend these purchases and always preach diversification, don’t hold too much of your retirement plan in company stock, etc. If you want to aggressively invest, then do so with a manageable portion of your portfolio. You have a much better chance to recover and stay in the game. Risk management is a big part of the services I provide to clients as a money manager. Until next blog post, be well.