Customer Reviews

It's Earnings That Count: Finding Stocks with Earnings Power for Long-Term Profits

5 star:		(11)
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3 star:		(3)
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1 star:		(0)

 

 

This book describes a fundamental approach to stock selection. It combines the "margin of safety" approach using free cash flow of Graham with the Economic Value Added (EVA) approach of determining returns in excess of its weighted average cost of capital. The author charts these new Defensive EPS and Enterprising EPS so you can see if they meet a minimum test.

The book is easy to read and the techniques are easy to apply. The author also gives you some extra ratios to help screen out your long term purchase candidates.

It's not a deeply academic book but more of a presentation of practical advice and a proprietary fundamentalist stock selection system that will keep you out of trouble. The author also discusses how to evaluate management and how to evaluate competitive advantange. These chapters were also good.

There are many interesting examples in the book. The book makes it look simple but I'm sure there are many areas in financial statment analysis where you'll be scratching your head to create these new EPS figures. Still, overall the book is great.

John Dunbar
Sugar Land, TX

Could you have predicted the downfalls of Enron and MCI Worldcomm? Could you have predicted the meteoric rise in Dell? Now you can with the tools Mr. Heiserman provides us in this must read.

Whether you are a beginner or expert, the book gives everyone tools that they can use in their investment approach. First, the book discusses what to look for in companies. Chapters 5 through 7 are my personal favorites. These provide the investor with the structure and format to analyze companies. The premise is that you need three sets of earnings statements to accurately analyze a company. The first is the enterprising income statement that allows you to deetermine if a company can create value for its investors. The second is the defensive income statement that allows you to determine if a company can self fund (does it need to borrow money or can it grow from within). The third is the plain, old income statement (called accrual income statement), which focuses on what was reported. Mr. Heiserman shows you how to chart these earnings to determine if the company you are analzying is the next Dell, Enron, or something in between.

Finally, he explains to the reader a valuation technique (the Croesus Test). This allows the reader to understand and appreciate whether now is the right time to buy.

On a personal note, after reading the book I read an article he wrote regarding Sanderson Farms. He recommended that it be purchased based upon the methodology used in the book.

I then emailed Mr. Heiserman and pointed out that my own valuation techniques showed this company to be overvalued. Surprisingly, Mr. Heiserman is both accesible and generous with his time. He emailed me back several times and almost immediately. Since his article, Sanderson Farms is up an astounding 93% (split adjusted price of $27 at the time of the article). In the meantime, the market has been flat. I guess I was wrong.

In any event, if you are looking for a method that works and an easy to learn format, this book is for you.

It's Earnings that Count should be on every investor's bookshelf. Whether you are a seasoned investor with an extensive background in accounting or just a beginner, this book is a must-read. Hewitt Heiserman effortlessly incorporates Benjamin Graham's defensive and enterprising perspectives into one easy-to-use system to determine a company's true earnings power. While these two methods are well known to the avid investor, Mr. Heiserman presents them in a fresh visual perspective, which through example, empowers the reader to not only learn how to discover the next Microsoft, but also how to avoid the next Enron or WorldCom.

This was a very informative book and discussed an excellent perspective for evaluating value stocks, especially in the current market. I would highly recommend it to the value investor who is willing to roll his/her sleeves up and get into some serious research for a prospective long-term position, with a time horizon of three or more years. What I have learned will help me to avoid the pitfalls of countless stocks that are being eagerly recommended but which pose unacceptable risk for the long-term investor (e.g. Enron and Worldcom type stocks).

Having said that, the book is occasionally (but infrequently) lacking in critical details that would help the reader to understand and replicate the author's analysis models. The preface says the book assumes no prior knowledge of accounting, but I personally feel an accounting background would have helped. It is very dense and occasionally dry reading, only for those truly motivated to profit from risk minimization in a difficult market.

The concept taught in this book (of the methods used to evaluate a company) is very good.
It's an extra tool to use in evaluating a company - a very sensible tool. The only reason I gave this book 3 stars is because a lot of the figures in the examples are wrong. They refer to the Financial Statements of Wriggley at the beginning of the book, but then they transpose the wrong amounts in the examples.

If you are an individual investor serious about developing an indepth approach to stock analysis, this book is a must read.

Instead of following the advice of "gurus" on CNBC with short-term time horizons, this book provides a methodolgy you can use to buy and monitor high-quality stocks. Your stock selections will no longer be shots in the dark. Mr. Heiserman walks you through how to determine the true earnings quality of a company. Also, he discusses the equally important areas of competitive advantage and valuation.

I've follow this methodolgy since 2002 and added it to the investment process I use to select securities for my clients. It has been a tremendous help in avoiding high risk stocks and enhancing the quality of client portfolios.

Please note that you should visit the "About the Book" section of his website (www.earningspower.com) after purchasing the book. Download the .pdf file that includes a few corrections that will help in understanding the examples he provides.

I am surprised that more investors have not read this book.


This book sets forth an excellent, step-by-step methodology to analyzing stocks that should be of interest to most fundamental investors. The author is a professional writer, and consequently the book is well-written and relatively easy to read even though it also covers some fairly complicated topics. The methods he describes are well thought-out and explained, and I honestly believe they can be of tremendous use to fundamental investors seeking to make investment decisions with respect to particular companies.

Heiserman's main point is that GAAP accounting means that the accrual income statement may not properly reflect the position of a particular company. In this way, he is similar to Marty Whitman (see "Value Investing" and "The Aggressive Conservative Investor") although he is certainly not a traditional value investor. Instead of focusing on book value like Whitman, Heiserman has created a means to adjust the income statement to overcome shortcomings in GAAP to identify companies that are financially sound with strong growth prospects.

His method is to create two new income statements for each potential investment - a "defensive" income statement that will reveal the company's need for outside capital and determine what the company's risk of going bankrupt is, and an "enterprising" income statement that will analyze how effective the company is at earning a return on its capital investment. In this way, Heiserman details a step-by-step methodology to find financially stable companies with strong growth prospects.

Heiserman eschews formulaic investing, meaning that applying his methods takes some time and effort. However, he also sets forth a helpful "five minute test" to enable investors to quickly assess whether it is worthwhile to dig deeper into a company's financials. He also provides good information regarding how to conduct competitive analysis and assess management (although some of the latter information may be dated due to recent SEC disclosure developments). Lastly, because the methods Heiserman has created rely on past financial statements, his methods minimize the possibility that an investor will make overly optimistic assumptions about a company's future prospects.

In all, I would highly recommend this book to intermediate-level investors who are willing to work to uncover individual stocks with sound growth prospects at reasonable prices.

I read this book last fall when it came out, and found it to be a quick, engaging read. Mr. Heiserman is able to bring clarity to what can sometimes be dense subject matter. For an intermediate level investor such as myself, I find it rare to find such insight in a style that allowed me to finish the book in two nights.

The best thing about his approach is that not only does it yield market beating returns, but it does so with the type of sound investments that allow one to sleep soundly.

As with some of the earlier posters, I'd like to thank the author for his generosity in sharing his time and insight. I've exchanged a few emails with him, and he's always been gracious in sharing his insights. In an April 12, 2004 Business Week article (full disclosure: I work for McGraw-Hill), the author picked six stocks which eleven months later were up an average of 37% vs. 5% for the S&P and 3% for the Russell 2000. Will he continue to have that kind of awe-inspiring success? Probably not. Will his methods continue to beat the market over the long run? I'm betting on it.

By sharing some of his picks, Mr. Heiserman has at times given me a fish to eat. By writing this book, he's taught me how to fish. Highly recommended!

Calculating the real value of an investment and its potential takes a lot of detective work.

Fortunately for us all Mr. Heiserman has written the gold standard for "The Standard Operating Procedures to Probable Investment Success." Certainly it cannot guarantee it. In most cases it will keep you out of trouble and guide you considerably closer to your goal. Was it Voltaire who once said, "Common Sense is uncommon."

In conjunction with services such as Value Line it offers far better odds at success.

I believe Warren Buffet was once asked, why not do something else and to paraphrase he replied, "Why bother when investing is so simple." If you read the book and apply it you will understand why he said that; simple yes, easy no, hard work yes.

Happily most people will not wish to do the hard work and will continue to purchase investment advisory services hoping that they, with little effort, will be blessed with magnificent returns.

So read the book, work at applying it and you will be amazed; I was. I have a library full of investment books and this is the only one on investments I would take to a desert island.

As an investment advisor I am always looking for resources that help me make better decisions for my clients. This is what I found with Mr. Heiserman's book. It is well written and filled with useful insights and charts. I would recommend this for anyone looking to further educate themselves on evaluating good stock picks. A great addition to my investment library.