2 Overlooked Factors That Practically Guarantee Success
There are two numbers in an annual report that can tell you more about a company's prospects than almost anything else. Those two numbers are the company's expenditures for marketing and R&D
Show me a company that's spending more money on marketing and R&D, and I'll show you a company that's growing faster than it's competitors.
A perfect example of this is E*Trade, a company that has made us a small fortune. E*Trade is one of the most amazing companies I've ever seen. In 1998, the company spent $400 million on marketing, which enabled it to grow at the astonishing rate of 1,000 new customers a day.
A thousand new customers a day! In over 35 years in business, I'd never seen this type of growth. I was so excited I could hardly contain myself. I couldn't believe that everyone wasn't jumping on this stock!
Well, of course there were no earnings. The company was plowing $400 million into marketing in order to grow the business. And it was plowing 13% of its revenues into R&D so that it could service all that growth. (In contrast, rival Ameritrade spends less than 1% on R&D!)
No here's the irony: If E*Trade had spent that money on real estate or vehicles or other things that would have contributed nothing to its growth, the stock would have looked better "on paper."
That's because accounting rules allow you to list real estate and vehicles and other capital equipment as "assets."
But advertising and R&D cannot be listed as an asset. It has to be listed as an expense. So instead of showing a profit, E*Trade showed a loss.
Make no mistake about it, E*Trade is a great company. Right now, it's growing even faster than it was when I first recommended it! What's more, it plans to start offering its million-plus customers everything from banking services to mortgages to life insurance. This will add tremendously to E*Trade's bottom line.
Many people ask me if I still rate E*Trade as a "buy." The answer is yes-but only if you buy during dips or corrections.
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How Richard Schmidt Finds His Stellar Stocks
