The Chicks' 12 Steps to Picking a Stock

STEP 10  Increasing Growth

Note: This article focuses on Step 10 of the Chicks' Dozen. For articles focusing on other Steps, see the links listed at the bottom of the page.

Increasing growth... it’s a good thing, right Martha? I want my vegetable garden to grow, my nails to grow (impossible), and my kids to grow. Yep, except for my derriere, increasing growth is pretty much a good thing! The million dollar question is how best to measure a company’s growth? Which measurement is the most telling of a company’s continuing prosperity? Our own little nest of Chicks has grappled with this very same question. We know that simply looking at a stock’s price over a five year period is interesting, occasionally frustrating (when you see what gains you may have missed), but not necessarily the best indicator of how a company is doing. Through much chirping and more posting than I care to remember, we Chicks have chosen to measure growth in terms of sales. When it comes down to it, that’s really what a business is all about... product (and/or service) and how much of it is selling. Are more and more people trying to get it or have they found something else to satisfy their needs?

Ok, now that we know what we’re measuring, let’s discuss how to measure it and where in the heck ya go to get the information. Unlike the previous “numbers equations” of principles 6-9, we have no set percentage of growth requirement. We simply care about the direction the growth is heading. Whether it be screaming growth or slow and steady, both are appealing. Most importantly, we want it to be increasing, not decreasing. Now, being the Chicky Chick that you are, you may be asking yourself why you need to go through any equation at all for this number. Can’t you just look at the numbers for sales and see whether they’re getting bigger or smaller? You can, but the reason we do the math (albeit simple math) to come up with a percentage is to provide some context. Growth may be increasing, but has it been slowing? Is consumer demand dwindling? These are good things to know.

To find the direction of growth, you’ll simply compare two numbers. I’ll use a real company with real numbers so you can check it yourself. All numbers that we will need come from the Income Statement. Thanks to Chick Jana and the Web Gurus finding that statement is a piece of cake. On the homepage of this website, notice the egg button on the bottom right titled, "Research A Company". After clicking on it and going to the next page, scroll down to Chicks Dozen number ten, "Increasing Growth." At that point you can enter the ticker symbol of the company you're researching. Let’s take Amazon.com Inc. (Nasdaq: AMZN) for our example. After entering AMZN, click "GO." You will be taken to the Multex.com website. Scroll down the left margin and you will see Income Statement. Click here and you will be taken to Amazon's quarterly income statements for the last 5 quarters! Be forewarned, often sales is stated as “revenue” on the income statement and I don’t want the change in lingo to throw you. You say tom-A-toe, I say tom-AH-toe... same difference, they both make a great BLT!

To keep it simple we will just measure the sales growth of the last two quarters. Here is the formula (remember, all you’ll need here is that dusty old 7th grade calculator!)

Quarter 4 Sales – Quarter 3 Sales = X
X / Quarter 3 Sales = Y
Y x 100 = % sales growth

Let’s plug in the numbers and tap, tap, tap on the calculator...
700.4 – 972.4 = -27.2
-27.2 / 972.4 = -0.2797
-0.2797 x 100 = -.28% sales growth

See??? You did it, Chicky!!! You showed us that Amazon's sales have actually suffered a slight decrease in its most recent quarter. In fact, look once again at all 5 of those quarterly sales figures. There is one more thing to be learned. Some stocks are known as cyclical. This merely means their income often changes depending on the season. Since Amazon is a retail stock, one would expect their sales in the quarter leading up to Christmas to surge, while sales in the quarter following the holidays may suffer a drop off. Lo and behold, that is exactly what we see with the numbers in Amazon.Again, we want growth to be increasing, but now you can see how a little context tells a bit more of the story!

Now, if only I could get my nails to grow!