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

by Hewitt Heiserman Jr.

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An innovative way to see through a company's published numbers to discover its true investment potential

This book gives you a blueprint for finding a great growth stock for the next decade without taking on a lot of risk in the process. Inspired by the writings of Benjamin Graham, It's Earnings That Count examines a firm’s earnings quality from the perspective of a “defensive” investor who wants to avoid committing ruinous mistakes as well as the “enterprising” investor who seeks Wall Street’s next great opportunities. Unfortunately, as recent market history has shown, the traditional income statement is ill-suited to meeting the needs of these sometimes opposing viewpoints. As a result, investors can buy shares of a seemingly profitable company that, in fact, has poor earnings quality.

However, the author’s trademarked Earnings Power Chart combines Graham’s two personalities to reveal, in picture form, whether a company possesses authentic earnings power for long-term growth. Using the world-famous William Wrigley Jr. Company gum-maker as a case study, you will learn how to build these two alternate profit-and-loss statements to protect yourself. Since this book is written in plain English, you do not need to be an MBA or accountant to follow these step-by-step instructions.

Giving investors the tools they need to turn the tables in their favor, It's Earnings That Count covers:

The four limitations of the income statement found in every annual report, 10-K, and 10-Q
A quick-hitting, five minute test to sift out the obvious losers so you can save time and focus on analyzing potential winners
How to spot when a company is forging an Earnings Power Staircase—that’s your hallmark of a low-risk growth stock like Microsoft and Paychex
Why the charts of Lucent Technologies, WorldCom, Enron, and Tyco signaled trouble ahead of traditional income statement.
The 2 earnings power ratios you need before making your next investment
12 ways to check whether management’s interests are aligned with yours
A list of 15 items to check for to make sure the companies in your stock portfolio have a competitive advantage. (Hint: Great growth stocks always have competitive advantages.)
16 kinds of companies to avoid
20 indicators that it may be time to sell

“Well-written, intellectually sound, "accessible" to those who take the time to understand, and a poke in the eye to those who abused our capitalistic system and those (pros) who let them get away with it." -John C. Bogle, the founder and former CEO of The Vanguard Group

"In a single, easy to use index, Hewitt Heiserman captures the essence of growth and value—a most insightful approach to stock picking." -Charles W. Mulford, co-author, The Financial Numbers Game, Director, DuPree Financial Analysis Lab and professor of Accounting, Georgia Institute of Technology.

"Clear and engaging, Heiserman shows how to easily evaluate a growth company's investment potential for both conservative and aggressive investors. The result? The 'cautiously greedy' investor wins." -Tom Jacobs, Senior Analyst, The Motley Fool

“Heiserman’s unique and thorough analysis not only provides methods for avoiding companies with suspect earnings, but also uncovering the true gems that are able to grow well into the future.” -Timothy M. Mulligan, J.D., LL.M., CPA., CEO, Forensic Advisors, Inc.

“Hewitt Heiserman's innovative financial analysis techniques goes a long way towards providing an investor with an extra edge in identifying the growth stocks of tomorrow without being unduly exposed to excessive investment risk today.” -Thornton L. Oglove, Founder, Quality of Earnings Report

"This book lays the groundwork for becoming a successful long-term investor.” -Mark Sellers, Equities Strategist & Portfolio Manager, Morningstar, Inc.

"As an avid reader of investment books, I recommend this book wholeheartedly." -Arne Alsin, Real Money.com and The Turnaround Fund

“In a clear, sound and practical way, Heiserman provides an investment road map that enhances the odds of your becoming a successful long-term investor.” -Robert L. Rodriguez, Chief Executive Officer, First Pacific Advisors and two-time recipient of Morningstar Mutual Fund’s Manager of the Year

"You really do have to understand 'earnings' if you are to succeed long term in investing." -Jim Rogers, author, Adventure Capitalist and Investment Biker

"Heiserman shows investors how to uncover Wall Street earnings quackery and frauds. A must read." -Kenneth Lee, author, Trouncing the Dow

"Like a professional athlete, Hewitt Heiserman Jr. brings intensity and brainpower to the world of investing. You need the graduate school that It's Earnings That Count can provide. Buy the book and do your homework." -John D. Spooner, Director-Investments SmithBarney Citigroup and author of Confessions of a Stockbroker, Sex and Money, and Do You Want to Make Money or Would You Rather Fool Around?

"Great addition to the literature! Hewitt Heiserman has crafted an easy read, basic tutorial on avoiding the most common mistakes caused by accounting phony baloney-combined with some age old investment wisdom. Mandatory for the intermediate investor!" -Kenneth L. Fisher, CEO of Fisher Investments Inc. and Forbes' "Portfolio Strategy" columnist

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All Customer Reviews
Average Customer Review: 4.5 out of 5 stars

0 of 0 people found the following review helpful:

3 out of 5 stars

Informative, useful, dense, difficult, 2008-03-27
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.

0 of 0 people found the following review helpful:

5 out of 5 stars

A Must Read, 2008-01-05
I think every investor should read this book. The book explains how to combine cash income and an adjusted version of accrual income to get an accurate assessment of the quality of the company's earnings and its potential future earnings.

The book also shows how to modify the accrual income by capitalizing certain expenses and by accounting for the cost of equity using the appropriate discount rate. These modifications make the accrual income a much more accurate measure of the real earning power of the company.

The book is written in a very easy and readable way. All the concepts are very well explained. Interesting examples of real companies are used to show the ideas in the book. The book is very concise without any useless stories to fill the pages (like most investing books do).

4 of 4 people found the following review helpful:

5 out of 5 stars

Highly recommended, 2007-03-29
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.

2 of 3 people found the following review helpful:

5 out of 5 stars

Yes It's Hard Work, 2006-01-30
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.

7 of 8 people found the following review helpful:

3 out of 5 stars

Good Book - needs revising, 2005-09-19
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.

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