Wednesday, March 6, 2013

Surprise! Revenue momentum leads the way

One of the criticisms of the post-2008 recovery bull market, especially in its early stages, was that it was driven primarily by cost-cutting measures on the part of corporations.  While there was undoubtedly some truth to that assertion, cutting costs can only take you so far.  Sooner or later the benefits of cost cutting will reach their limits and, if you want to keep the positive trend going, you have to start showing increased sales. 

Indeed, corporate sales figures are in many ways a more important measure than net earnings.  A rising trend in revenues can serve as an excellent “heads up” indication that a company’s undervalued stock is about to turn up.  Aside from internal sector momentum and price momentum, I consider sales momentum to be one of the most important things an equities trader should look at when evaluating a stock. 

As it turns out, corporate revenues have risen appreciably during the last several quarters.  According to Dr. Ed Yardeni (, S&P 500 revenues per share bottomed during Q1-2009 and are up 30.2% through Q4-2012, and 5.9% year over year.  Revenues for the S&P 500 Industrial Composite, which excludes Transportation, Financials, and Utilities, is up 42.4% over this same period, and 4.4% y/y.  “Both measures are at record highs,” writes Yardeni, “and I am predicting that revenues will increase 5% this year and next year.”

Meanwhile forward revenues, the time-weighted average of these two forecasts, rose to a new cyclical high.  The strong revenue trends show that this bull market is built on a solid base.

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