Hey Trader,
Years ago, I worked a trading desk alongside Don Kaufman. That’s where I learned to avoid stocks with lumpy earnings.
I was the chief technician there. A lot of the charting tools you trade off today came out of my head.
One day, I figured I could trade Boeing. I lost $4,000 in 15 minutes.
Everybody on the desk ripped on me. They joked about hauling me out in a straight jacket.
I’ll never trade that stock again. It’s the reason I have a rule against stocks with lumpy earnings.
Lumpy earnings swing from a profit one quarter to a loss the next. Boeing has done that again and again.
A stock’s price rests on what investors expect it to earn. When the earnings never stay consistent, nobody knows how to price it.
Anyone who tells you they can is lying. Trade it anyway, and you’re playing with fire.
I’ll show you how to spot stocks with lumpy earnings before you take the trade. You’ll also see the two rules that keep them off my list.
Learn it here, and you won’t have to learn it the way I did. Let’s start with what Boeing’s earnings actually look like.
What Stocks With Lumpy Earnings Look Like
Stocks with lumpy earnings don’t grow in a straight line. Their companies post a profit, then a loss, then another loss.
Boeing fits that description. It made money for a stretch, and then it lost money quarter after quarter.
Boeing isn’t going bankrupt. It’s the largest plane maker in the world, and the government will shield it.
None of that makes it tradable. I’d avoid the stock like the plague.
Why Nobody Can Price These Stocks
When I price a stock, I start with earnings. I add up the last four quarters and divide that number into the price.
That tells me the multiple I’m paying. Medtronic earned a little less than $6 over its last four quarters.
At 85, that worked out to a multiple of about 13. I trusted that number because Medtronic kept delivering its earnings.
Boeing’s price rests on the same thing. Investors value it on what they expect it to earn.
Its earnings never stay consistent. When nobody can price a stock, nobody agrees on what it’s worth.
I learned that the hard way in 15 minutes.
I’m a 39-year veteran. Nobody knows how to trade this stock, and that includes me.
Stocks with lumpy earnings turn every trade into a guess.
The Two Rules That Keep These Stocks Off My List
Over my career, I’ve boiled this down to two rules:
- If a company doesn’t make money, don’t buy it.
- If it makes money only some of the time, don’t buy it either.
If you worked for me and bought a stock that loses money, I’d fire you.
The first rule keeps me out of neo-cloud stocks. Those stocks have been taken out to the woodshed and wrecked.
Some have dropped 50%. A 50% drop doesn’t make a stock that loses money cheap.
I wouldn’t buy them at any price. I don’t care what the book value says.
The second rule keeps me out of stocks with lumpy earnings like International Paper. I was ready to buy it at 34 on Thursday.
Its earnings are so lumpy that they scare me. I’m on the sidelines, because I’d rather be safe than sorry.
You can find stocks with lumpy earnings bouncing off a bottom with a pretty chart. Charts are worthless if you don’t know what a company’s worth.
How To Spot Stocks With Lumpy Earnings Before You Trade
Start with the earnings and look at the chart second. Before your next trade, run these three checks:
- Add up the last four quarters. Divide that total into the price to find your multiple.
- Compare each quarter to the same quarter a year earlier. You want to see the number climb.
- Look for any losses. If the record flips between profits and losses, take the trade off the table.
eBay shows you what a clean record looks like. Its earnings for one quarter went from $1.36 to $1.51 against the same quarter a year earlier.
eBay is growing at only about 10%. It keeps lifting its earnings, and that consistency keeps the stock going.
A stock like that gives you something to price. Stocks with lumpy earnings never will.
I paid $4,000 to learn this rule. You don’t have to.
Those two rules sit at the core of how I trade. Every trade I take also has to pass five key indicators.
When all five trigger, it’s a high conviction trade. I also scrub every trade on a weekly, a daily and an hourly chart.
That’s why I make a little on my winners and never lose a lot. I don’t guess, and I don’t trade stocks with lumpy earnings.
The Genesis COG System gives you the complete methodology behind those rules. You’ll learn which trades to take and which stocks to leave alone.
The Genesis Cog Scanner adds real-time signals on top. Together, they keep you trading companies you can actually price.
Join the Genesis COG System Today
Professor Jeffrey Bierman
Creator of the Genesis COG System
