Past Prosperity is no Gurantee of Future Earnings Success.

You should always question the indefinite continuance of past prosperity in your high dividend stock earnings.  Below are some examples for you to consider.  Do any of the stocks in your portfolio have any of these traits?
 
Companies with a single successful product that can lose market share rapidly as competition encroaches with new generic products.  Small biopharma stocks come to mind here.  Their successes will typically be short lived.  The stability of their earning power is constantly threatened.  US patent protection can't protect them in a worldwide economy.  Chinese drug factory owners don't care about American patent laws.  The generic drug manufacturers can sell their products to Canadian and Mexican distributors.  Those distributors can resell them to Americans trying to escape the ever rising drug prices caused by the evil Federal Reserve and health care fascism.
 
Any company that relies on a fad should not be counted on to maintain its earnings growth beyond the duration of the fad.  Crocs (CROX) and other fashion fads come are good examples of this.  Trendy products grow quickly to peak popularity and then quickly fade.
 
There will be an earnings explosion for companies that produce a good that the people calling themselves the government re-legalize.  The initial goods producers enjoy high prices until the supply catches up to demand.  Here are some examples of such transitory profits: rare earth metals mining, nuclear power plants, offshore oil drilling, and marijuana production (in several States).  This exact situation occurred in 1933 when a bunch of brewery stocks came back into the market after the US government's tyrannical prohibition of alcohol.
 
You should be wary of large profits in the stocks you own that are likely to be transitory in nature.  These transitory profits can cause you to overestimate the earning power of a company.
 
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Published in: on January 24, 2011 at 6:16 pm  Leave a Comment  

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