The Six Factors You Need to Cut Through Earnings Noise and Pick Winning Stocks

Shah Gilani|July 14, 2023

We’re about to kick off a new earnings season, with major financial institutions reporting today. That’s leaving a lot of people wondering if we’re going to hit a snag in the overall bullish trend we’ve seen in the stock market so far this year, especially if earnings disappoint.

It’s certainly possible, but I’m not sure it’s likely. The numbers would have to be especially bad to move the needle on the positive trends I’m seeing, and while we may see some volatile swings as investor sentiment goes back and forth, I’m still convinced we’re at the beginning stages of a new bull market.

So I think your time and energy is better spent cutting through all the noise and looking for the best investment opportunities available to take advantage of the bullish direction we’re heading in.

And earnings are an important part of that, don’t get me wrong. That’s why smart investors pour over reports and tune into earnings calls. But earnings alone won’t help you make brilliant buying and selling decisions.

That’s because earnings are part of a much larger window through which investors should be looking.

Here’s the thing: successful investing is always about the big picture, and the big picture is the company, not the stock. The stock of a corporation is the manifestation of investors’ and traders’ understanding and assumptions about what the company’s doing, how they’re doing, and what their future looks like.

I’ve developed a lot of different ways of evaluating companies over my 40-year career, and for me, it comes down to six key measures, or windows, through which I view a company that matters. These criteria have helped me pick winners, over and over again.

Today, I’m going to share them with you and explain how checking the box on all six of these will supercharge your stock-picking success.

To put my six measures into some context, I’ll apply them to Microsoft Corporation (MSFT), which I own because it meets my six criteria and then some.

So, first of all, I look at a company’s leaders. Who is in charge of the company? How capable is the company’s management team? Are they leaders in their industry? Are their products or services the best?

I didn’t own Microsoft when Steve Balmer was running the company, I sold my stock because I thought he was merely a loud leader, in the sense of being more like an over-the-top cheerleader, as opposed to a visionary leader. The stock suffered for years under Balmer’s lackluster leadership. Noise alone doesn’t get things moving, vision and an action plan, and brilliant execution does.

Enter Satya Nadella. Nadella succeeded Balmer in 2014 and laid out a completely new vision for the company, including developing the “cloud” and pushing the company’s services over hardware.

Under Nadella’s leadership, Microsoft became a leader in the cloud, in software-as-a-service, in recurring revenue.

Second, I look for “Acceleration.” Is the company’s growth accelerating? Is the company moving quickly into new businesses, pursuing new opportunities, and how aggressive are they?

Microsoft moves quickly, remarkably quickly for a company of its size, in most everything it does. That’s why at a $2.6 trillion market capitalization it’s still a “growth” company.

Third, I look for a “Unique Edge.” Does the company have a unique edge? Are its products or services unique? Can the company do things other companies can’t?

In Microsoft’s case, it has lots of unique edges. Its Windows platform, for example, is unique in the sense that it is its own ecosystem into which customers are immersed and pay for services, and you can say, “pay to play” in that system. Of course, Microsoft has lots of other unique edges, too many to even list.

Fourth, “Numbers” are important. Earnings are the perfect example here. What are the company’s earnings? What are their revenues, margins, profits, cash flow, and all the other numbers that investors should fawn over.

Microsoft’s earnings are expected to be released on July 25, 2023. We’ll see then what they are.

Fifth is “Capitalization.” What a company’s capitalization is, what it consists of, what the pieces are and what sort of foundation they form is very important. That’s because equity capital matters – newsflash, because that’s the stock price. But so does a company’s debt structure, its leverage, ratios as measures of its strength and ability to finance its growth or acquisitions… these are all important structural components of a company and its balance sheet.

On that front, Microsoft has few equals.

And last but not least, the sixth criteria I look for is what I call “Heat Factor.”

Is the company doing anything that’s newsworthy, groundbreaking, different enough (in a good way of course) to draw attention to the company and moreover to its stock. Because if there’s a heat factor, there’s a reason the stock’s going up.

I bet you can guess what Microsoft’s latest heat factor is. It’s investing $13 billion in OpenAI and incorporating ChatGPT into its Bing search engine.

Those are the six measures or windows through which I view companies to determine if I want to own their stocks, which I used years ago when I bought MSFT. I’ve bought more over the years because the company keeps checking all those boxes, over and over.

We’ve just scratched the surface here, but I’ll keep coming back to these criteria in future articles. As always, keep an eye on your inboxes.