My #1 Stock Metric

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What if I told you there was only one single metric you need to know to trade stocks?

Like many novice investors, I spent a lot of time at the start of my career looking at all kinds of different stock metrics...

Building spreadsheets, analyzing company valuations, and comparing them to dozens of other metrics.

I easily spent hundreds of hours doing all this work.

And it did virtually nothing to make me money.

It took me two decades to realize this. But eventually, I figured out that there’s one — and I mean only one — metric that drives stock prices.

That metric is earnings growth. Let’s talk about it…

The Only Stock Metric That Matters

When you hear most investors talk about attractive stocks, you’ll hear them talk about the valuation of a company.

They’ll discuss the multiple of earnings or cash flow. They’ll often compare it to other companies, the multiple of the market, or the company’s history.

Then based on how cheap that multiple looks, they’ll decide whether the stock is attractive or not.

But this method is completely 100% WRONG and can cost you a ton of money.

Not once in the stock market's history has a stock gone up just because it was “cheap.” Stocks go up because they grow their earnings and cash flow.

Even Warren Buffett, the greatest value investor of all time, understands this.

Take a look at one of his most famous stock picks, The Coca-Cola Company (NYSE: KO).

Buffett bought his stake in KO back in 1988. That original $1.3 billion investment is now worth almost $25 billion!

Here’s a table showing the earnings per share (or EPS) for KO going all the way back to 1988. It also includes the valuation multiple and the dividends paid that year.

Now, let’s discuss some of these numbers.

The year Buffett bought the stock, it was trading at roughly a 16x price-to-earnings (or P/E) ratio. For comparison, the S&P 500 was trading at around a 14x P/E ratio at the time.

In other words, KO was slightly more expensive than the market.

That 16x multiple is around the long-term multiple of the stock market. While KO stock wasn’t expensive by any means, it’s hard to argue that it was cheap.

Here’s a table where we put together the growth in these metrics and tied it back to the total return of KO stock…

You can see that the stock is up almost 2,200% over the period.

The valuation multiple has expanded, with some hitting roughly 25x on last year’s earnings versus 16x back when Buffett bought it.

That is a 71% increase that drove only a small part of the returns. The real driver was the earnings!

Over the period, they’ve gone up almost 2,400% and powered the stock price higher.

If the stock hadn’t grown earnings like it has, I don’t think it would have done very well for Buffett and other investors.

It wasn’t the valuation that made KO a fantastic stock — it was the EARNINGS GROWTH.

If there’s one thing I could say to my 23-year-old self when I started my investment career, it would be “Look for the earnings growth.”

Since I don’t have a time machine, I’ll impart that advice to you. Earnings growth is the one single metric that always works.

Here’s why…

If you find a company that’s going to grow EPS from $1 to $10, then that stock is going up. It’s that simple!

As I’ll often say, it might go up now or it might go up later. It might go up a lot or it might go up a little. But I guarantee you the stock is going higher.

I’d also bet that if a company really is growing EPS that much, then the stock goes up a lot and soon.

If you use only one metric — it should be this one.

By successfully identifying companies with this kind of earnings growth, you can successfully identify great stocks.

I’m looking for strong earnings growth in both my trading and investing strategies.

In the trading strategies, I look for stocks with solid growth that have stumbled – names such as Meta Platforms (META) and Nvidia (NVDA). This presents a greater chance that they will rally.

In my investing strategies, I look to identify stocks with huge growth – think Talon Energy (TLN) and CAVA Group (CAVA). Find those, and you can find stocks that are 20-baggers like KO.

So don’t get distracted by all the worthless metrics pushed by the “smart” money.

Instead, keep it simple and focus on the growth.

To Making YOU Money,

Enrique Abeyta