If you’re looking to make consistent long-term profits from FTSE 100 stocks, there’s one thing, in particular, I think you should focus on.
It’s not P/E ratios. Often, cheap FTSE 100 stocks just get cheaper. And it’s not dividend yields either. High yielders often turn out to be poor investments. Curious to know what it is? Read on and I’ll tell you…
Making money from FTSE 100 shares
In the short term, stocks can rise for many reasons. However, in the long run, share prices are driven by one thing – earnings growth.
Companies that increase their earnings significantly over time tend to see big increases in their share prices. So the goal, as a long-term investor, should be to invest in companies that are nearly certain to increase their earnings substantially in the long run.
Now, what’s the key driver of earnings growth? It’s revenue growth. If a company is growing its revenues, it’s generally much easier for that company to generate earnings growth.
Conversely, if revenue growth has stalled, or revenues are falling, it’s much harder for a company to generate earnings growth.
So before you buy a FTSE 100 stock because it’s cheap, or because it has an attractive dividend yield, stop and think about the company’s potential to generate long-term revenue growth.
Ask yourself questions such as:
Are this company’s revenues going to be considerably higher in five or 10 years’ time?
What’s going to drive this revenue growth going forward?
Does the company have products or services with sufficient market potential to make a sizeable increase in sales for at least several years?
I’ve stolen the last question from the book Common Stocks and Uncommon Profits, by Philip Fisher (who was a mentor to Warren Buffett). It’s a great question to ask when analysing a company.
Find a company that has the potential to generate huge revenue growth in the years ahead, and you’ll automatically increase your chances of making a profit.
FTSE 100 winners and losers
An analysis of revenue growth helps explain why some FTSE 100 companies have been excellent performers over time, and others have been poor performers.
Companies such as BT Group, Vodafone, and Next, which have all struggled to generate any meaningful revenue growth in recent years, have underperformed in a big way.
Meanwhile, companies such as London Stock Exchange, Rightmove, and JD Sports Fashion, which have generated strong revenue growth over the last five years, have all delivered fantastic gains for investors.
Stack the odds in your favour
Of course, when picking stocks there are many other things to focus on aside from revenue growth. A company’s profitability, balance sheet strength, and valuation are all important. Strong revenue growth doesn’t guarantee you’ll make a profit.
However, by focusing on long-term revenue growth, you stack the odds in your favour. Find a FTSE 100 company that’s set for big revenue growth in the years ahead and the chances are you’ll profit from that company in the long run.
Edward Sheldon owns shares in Rightmove and JD Sports Fashion. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.