Rules of the Game: The Quest for Fat Profits

 | Dec 14, 2012 | 12:00 PM EST
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In the past couple of columns I have focused on revenue growth, which is one of my favorite fundamental metrics.

However, it always boils down to earnings. That said, be aware that profit can be affected negatively one-time charges, for instance, and it can be bumped higher by such things as cost-cutting. That had been a prevalent phenomenon a few years back.

At any rate, I did a more traditional "earnings growth" scan for today's column. As with revenue, it's informative to sort companies here by market capitalization, as younger and smaller outfits often sport the best levels of bottom-line growth. The reasons for that are pretty clear: Among other things, tese firms often have enthusiastic and creative management, and they may have new products or services that enjoy robust demand.

Still, when I'm building a portfolio of individual stocks, I like to start with the large-caps as the anchors.

The biggest company that jumped to the top of my earnings scan was Toyota (TM), which grew income at triple-digit rates in the past three quarters. I like to see earnings growth that's revenue-driven (no pun intended), and that is the case with Toyota.

The company has suffered through a number of high-profile and embarrassing product recalls, but sales remain robust, and profit has picked up its decline in 2011.

Most recently, earnings came in at $2.09 per share for a year-over-year gain of 212%. In the current quarter, analysts expect earnings of $1.36, more than double the year-earlier results.

Toyota's dividend yield is 1.6%. On Wednesday, the stock rallied within $0.15 of its 52-week high, $87.15.

Here, as well, is a bullish technical note: The stock's 50-day average crossed above its 200-day line earlier this week. That type of crossover often precedes further price gains.

Comcast (CMCSA) is another big-cap earnings leader. Earnings growth at this company has ranged between 19% and 39% in the past four quarters, and profit has increased over the past six years.

This year, analysts expect the company to deliver per-share income of $1.96 per share for a year-over-year gain of 24%.

This stock has been consolidating along its 10-week average, having pulled back from an all-time high of $37.96 Nov. 2. On Thursday, shares fell 1.3%. Volume was heavier than in Wednesday's session, but still below average levels.

Turning to the dividend, when you are looking at big-cap names as portfolio mainstays, this metric is important, but it's not the end-all, be-all. In Comcast's case, the payout yield is 1.8%. That's OK, but keep in mind: The dividend trade has become crowded as investors have shifted to equities to seek yield. In addition, mid-year malaise in the S&P 500 has sent many investors into the dividend stampede.

Comcast stock far outpaced the benchmark index this year, achieving a gain of 55% so far for 2012. It declined 0.9% last month, and is down 0.7% so far in December, having closed Thursday at $36.94.

The current pullback has been fairly shallow, and the stock is currently about 13% above its 200-day moving average. Because of the lengthy run-up prior to November's retreat, it would not be out of the question to see a steeper or lengthier consolidation at some point soon. However, for the moment, with the earnings picture remaining strong, Comcast is a viable candidate as a large-cap anchor to a portfolio of individual stocks.

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