What Louis Navellier looks for in a stock … and why it’s more important than ever to use his strategy today

Today, we’re kicking off a special two-part Digest series that focuses on Louis Navellier and his Accelerated Profits system.

Why?

Well, in answering that, let me briefly digress …

This past Monday after the market closed, Alphabet reported disappointing sales and earnings … and shares tanked on the news.

By end of day yesterday, shares had dropped nearly 10% from Monday’s close.

Now, here’s the thing … Alphabet beat earnings estimates.

Earnings per share came in at $11.90 versus estimates of $10.60 (excluding the impact of a $1.7 billion fine by the EU for anti-competitive practice).

Here we have one of the most successful, dynamic companies in the world — beating earnings estimates — yet getting punished by investors.

Why?

Because investors realized that the quality of Alphabet’s earnings was suspect.

***The healthiest type of profits always ties back to one thing — sales

In other words, top-line revenues. At the end of the day, if customers aren’t buying enough product, your business won’t be around for long.

Bottom-line earnings can be manipulated through fuzzy corporate accounting (for instance, deferring certain expenses until a future quarter, which makes current profits look bigger).

Earnings can also be affected by share buybacks. When a company buys back lots of its own shares, the remaining shares enjoy a bigger pro rata portion of earnings — which artificially boosts earnings per share numbers, making them look far better than otherwise.

The reality is Alphabet’s revenues missed estimates by nearly a billion dollars — its first miss in two years.

So, earnings per share were up? Investors didn’t fall for it. Instead, they saw that Alphabet’s organic revenue growth was showing unexpected weakness, which called into question the quality of the earnings number.

Now, what does any of this have to do with Louis Navellier?

Well, Louis — who’s one of the most respected and successful figures in investing — has built his success on the back of a market approach that focuses on earnings quality.

Had an Alphabet investor been using Louis’s Portfolio Grader, he would have seen the red flags before the disappointing earnings result. As Louis says …

If a company is struggling to sell its products or is spending more than it makes, it’s not a company you want to own for growth.

And it’s never been more important to be aware of this than right now.

***You see, even though the market is still pushing new highs, conditions are changing

If you’ve been following earnings this season, you’re already aware of this. We’re on pace to see an earnings-decline of 2.3% this quarter — the first decline in almost three years.

This means that fewer companies are posting solid earnings numbers. This is going to result in a “narrower” stock market, so to speak, with investors chasing those fewer companies that are boasting real, quality earnings numbers.

Here’s how Louis describes it:

The reality is that the earnings underneath the S&P 500 have fizzled due to more difficult year-over-year comparisons …

So, if you want to be successful in the coming months, you must avoid stocks with drastically slowing earnings and load up on stocks that can sustain positive earnings momentum.

With this context behind us, let’s now turn to Louis and his Accelerated Profits system.

You see, this coming Friday, Louis is releasing two brand-new stocks to join his Accelerated Profits portfolio. These are companies with top-notch earnings quality which, if Louis’s track record is any guide, are likely to make big returns for subscribers. So, as a courtesy to all our Digest readers, we wanted to make sure you were aware of it first.

But, as importantly, we want to walk you through how Louis views earnings and fundamental stock analysis — it’s the same methodology he uses in his Accelerated Profits system. That will help make you a wiser investor starting today.

With that behind us, let’s jump in …

***”An icon among growth investors” — that’s what The New York Times called Louis

When you see Louis’ track record, you realize why that title is deserved.

There’s been 1,125% gains in fast-growing beverage maker Hansen Natural … 457% from the energy firm Holly Corp … 430% gains in the fast-growing computer chip maker NVIDIA … and 477% in the computer storage firm EMC Corp … and the list goes on and on.

The origin of Louis’ system, which accounts for these gains, dates back to his days at Cal State Hayward. He was tasked by a professor with creating a model portfolio that mimicked the S&P 500. It turns out Louis failed — by consistently beating the S&P.

As part of the project, Louis was given access to Wells Fargo’s mainframe computers to run simulations. And through this process, spending hundreds of hours on research, Louis isolated eight key qualities which are shared by super-performing stocks.

When you’re doing your own fundamental analysis, this is where you need to start.

The first four are based entirely on earnings. From Louis:

Earnings Growth: Earnings growth is the heart of all good financial analysis … I’m in the business of finding companies that are posting bigger profits no matter what the rest of Wall Street is doing.

Earnings Momentum: While earnings growth is important, I also want to see a company’s rate of growth increase.

Earnings Surprises: One key metric I closely examine is whether or not a stock is consistently beating analysts’ estimates. Beating estimates is called an “Earnings Surprise.”

Analyst Earnings Revisions: Upward revisions are an important indicator of a company’s future success.

While so many investors get sidetracked by the various headlines, fears, and predictions, a focus on real earnings helps wise investors stay grounded. That’s because the major drivers of a stock’s price over the long-term are earnings (and in the short-term, it’s surprises to earnings expectations). So, the more a company grows its earnings, the more its shares will be worth.

***Of course, as we saw with Alphabet, not all earnings are created equal

That’s why Louis’ system also screens for increasing sales growth. Remember, the best, organic earnings all start with great sales numbers.

From Louis:

(Sales growth) is one of the hardest numbers to fake. Sales are the lifeblood of any business — whether it is selling a service, a gadget, raw materials or anything else under the sun. There are many ways that companies can temporarily find capital, such as selling off assets or making outside investments, but it’s always bad news if people aren’t buying what a business is selling. Great companies make sure that sales increase month to month and year to year so they can expand, dominate their industry and deliver big returns to shareholders.

The remaining metrics which Louis uses to screen stocks are operating margins (he looks for high growth), return on equity (the bigger the better), and healthy cash flows (since cash is the lifeblood of any business).

***So, what happens when you use these screens and find elite stocks?

Well, you often see the massive returns like the ones which we highlighted a moment ago. 1,125% from Hansen Natural … 457% from Holly Corp … 430% from NVIDIA … and 477% from EMC Corp …

But here’s the thing — returns like that usually require lots of time. Even the best, fastest-growing companies need 3, 5, even 10 years to become industry dominators. You have to give growth stocks time to “gain weight” in order to maximize your returns.

And that brings us to Louis’ Accelerated Profits system.

About 10 years ago, while Louis was fine-tuning his long-term strategy, he stumbled on a way to adjust his approach which resulted in big, short-termstock gains.

It’s a way to make large profits, not over “years” of growth, like Louis was accustomed to … but through the specific days and weeks that the absolute best companies enjoyed compressed periods of hypergrowth in the share price.

Louis has used it to help his subscribers invest in the stocks that will not only survive, but thrive in any market condition.

How does this work?

That’s where we’ll pick up in the second part of this series tomorrow. But just so you know how powerful this can be, consider what can happen when Louis applies his Accelerated Profits system …

In early 2017, a semiconductor equipment company called Nova Measuring Instruments (NVMI) began registering extraordinary fundamental qualities like major earnings growth, expanding profit margins, and strong returns on equity. It also began registering very strong institutional buying pressure.

Louis recommended the stock just before it entered its breakout phase that produced a 96% return in less than six months.

Those are the kind of gains that are possible when you use Louis’ Accelerated Profits system, which combines great earnings power with the other key variable he discovered in his research.

As to what that is, we’ll pick back up tomorrow with the second half of our series.

Have a good evening,

Jeff Remsburg