The Trend

The No. 1 Fundamental Tool Used to Unlock Value

One of the single best stocks to own over the last four years had nothing to do with oil, biotech or really anything revolutionary.  In fact, it was quite boring and ignored.

Unjustly ignored, as it would turn out.

That company was Light Path Technologies (LPTH), which designs, manufactures and distributes optical and infrared components – like molded glass aspheric lenses and assemblies, infrared lenses and thermal imaging assemblies for the defense, medical, automotive, and telecom industries.

It wasn’t really anything exciting.  It’s not like it was going to be the next Apple. 

However, in mid-2013, it hit my small-cap stock screener around 75 cents a share.  So, I thought I’d watch it, never buying it myself.  I wanted to understand why it hit my screener and why it was so badly beaten up.

It had just fallen from a high of nearly $2.20 to just 75 cents.  Yet it was on my radar.  No one would touch the stock out of fear of further downside. But as it turns out, traders wrote off the stock, even though the company was still producing profitable quarters, impressive backlog growth, and revenue.

That’s probably one of THE biggest mistakes any trader can make, though.  By not paying attention to earnings, you may be missing a great deal of opportunity.  When it comes to any stock, technical analysis is essential, but so are earnings.

Earnings are company profits.  As long as they’re increasing, as we saw with Light Path, it generally leads to higher stock prices along the way.  Basically, the money a company makes – expenses subtracted from revenue – is known as its earnings.  The best way to view any earnings report is look compare current earnings to previous earnings. 

For example, with LPTH in 2013, I had noticed growth solid growth in my own research.  Yet, even with accelerating earnings, it was apparent the company was healthy.  No one bothered to study the bottom line of the company, though.

That’s too bad, too.  The stock recently hit a high of $3.25 – a potential 333% win.

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Interesting to note, the company is still showing impressive signs of growth.  In its most recent quarter, revenue soared 26%.  It even saw 700% growth in its operating free cash flow.  Gross margins rocketed 54% from 44%.  In the previous earnings report, it posted a 29% increase in revenue growth. 

By ignoring earnings, you do yourself a great disservice along the way.  It doesn’t matter what the rest of the market is doing with a stock.  If you see solid earnings growth on a stock that’s popping up on a screener, look into it.  Or, you may just miss 333%.