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Carnevale: Ross Stores a Buy on Bad News (Update 1)

Stocks in this article: ROST

Perhaps most importantly, they bring these strong fundamentals to the bottom line while simultaneously offering customer savings of 20% to 60% off department and specialty store prices. Consequently, the company's business model has proven to be very recession resistance as their historical record of operating earnings clearly illustrates.

The following graph plots earnings per share (the orange line) and dividends (the blue shaded area) only on Ross since 1999. Ross has consistently grown earnings at over 17% per annum, and the dividend has grown along with profits. On this graph the slope of the orange line is 17% (Ross's growth rate) and simultaneously represents a PE ratio of 17. Based on this graph, I believe Ross Stores represents the quintessential example of what a growth stock should be. Notice how Ross Stores' earnings growth actually accelerated during and after the Great Recession of 2008.

After examining thousands of companies, I have confidently determined that earnings drive market price in the long run. The following earnings and price-correlated graph magnificently validates the earnings and price relationship. The orange earnings justified valuation line represents a PE ratio 17.1, and the dark blue line represents a blended average normal PE ratio of 15.9. Notice how closely monthly closing stock prices (the black line) track and correlate to earnings.

Moreover, take note of how the price continuously moves back into alignment with the orange fair valuation line. When Ross Stores' price rises above the orange earnings line, it shortly moves back down, and when the price falls below the orange earnings line, it again quickly moves back into alignment. By August 2012, Ross's stock price had become overvalued but has since moved into slight undervaluation territory. Earnings clearly determine market price in the long run.

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