As well, you should note that 08/09 was a total write-off for almost every company, so those years shouldn't be factored into your decisions.
Look at general long-term direction. Look at the charts for stocks on the one year and two year scale. If the stock is consistently heading up, chances are, even with poor earnings, it'll recover after a month or two.
The key to factor in is that you shouldn't be too strict about your choices, but not too lenient, either. If a lesser-known company has had a consistent stream of recent good news, you should speculate on it. These companies don't guarantee great EPS results, however, they may pay better than just buying into blue chips, due to earnings surprises and various venture capital opportunities.
Not necessarily. When evaluating stocks most investors will be looking at a wide range of criteria. Inevitably some of them will not meet the ideal limits. It then becomes necessary to decide if you want to find the perfect stock, or one that meets most of your criteria.
If you set hard limits on your criteria, you need to restrict the number of things you consider.
An alternative is to set secondary limits. In the example you gave, you could require positive earnings for 5 years or for 8 out 10.
Not necessarily. A lot of companies lost money in 2009 during the recession. Ignoring them all seems pretty extreme.
One key concept is that the market is willing to pay more for stable earnings (ex: Proctor & Gamble) than cyclical earnings (ex: homebuilders). Within Financials, a diversified bank is likely to have a higher P/E multiple than a Savings and Loan (mostly mortgages, great sensitivity to interest rates).
You also need to take care with Book Value. It can be understated due to writeoffs. It can be overstated if it includes a lot of Goodwill from acquisitions. Graham would want you to analyze why a company is selling below book.
Past performance is no guide to future performance. Historic earnings growth is just one factor of many
OK ive read The Intelligient Investor of recent and when looking for stocks , ben graham stated that you should look for a stock with earnings stability positive for at least 5 years. Some of the stocks ive looked at have been potential candidates with them selling below book value. the only downside is i saw that in one year of 5 years that they had a deficit in EPS so would you dismiss this investment?
thanks
