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Keeping an eye on the top line

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Corporate earnings are key to stock prices over time, and an important factor in earnings – revenue – bears watching, Bob Landaas says in a Money Talk Video. Here is a transcript of the video.

I’ve made a career out of telling people that there are two things that cause stock prices to go up or down: Interest rates and earnings.

And it’s important to examine each of them at this point in time.

Interest rates are at historic lows, as we know. Interest rates have been going down for the better part of 33 years now after peaking in August of 1980. So bonds don’t offer much competition for stocks at this point.

And then the other is earnings. And when you drill into the earnings that we’ve seen so far this year, there are reasons for optimism and concern.

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One of the things that I’m worried about is that we didn’t see sales growth in the first quarter – top-line growth. The increase in earnings, roughly 5 percent from the quarter before, came almost exclusively because of cost-cutting.

Well, you can’t keep cost-cutting forever. You can’t keep reducing your expenses and have that drop to your bottom line. Ultimately, you have to sell more of your product or your service for your stock to go up.

So we’re going to be watching top-line revenue growth very closely in the second half of this year because if we don’t see top line growth, it might be a reason to get defensive.

When you look at earnings forecast for the next couple of years, I’m fairly optimistic – primarily because of global growth. But we’ll have to pay attention to top-line growth moving forward to make sure this market’s got some legs.

Bob Landaas is president of Landaas & Company.

Money Talk Video by Peter May

(initially posted June 11, 2013)

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