Some stocks, like 3M, Honeywell and Emerson, are what we call growth cyclicals, hybrids that have the characteristics of both kinds of stocks. They hold up at times of mild acceleration and stability.
Of course, some companies are levered to individual cycles. Deere, Monsanto and Potash are all about the farm cycle, chiefly whether or not the farmers are flush. Boeing and Precision Castparts and to some degree United Technologies hug the aerospace building cycles and track worldwide aircraft demand.
Others have their own secular-growth themes, such as the renaissance of oil and gas, the desire to look and feel well, and the aging population. Those themes are myriad and pervasive, and I spend the next chapters describing the best ones to profit from over the long term and which stocks best fit the long-term winning theses.
But all stocks, whether they be cyclicals, growths or hybrids, get graded the same way by analysts: Are the underlying fundamentals of the enterprise better or worse than expected, as expressed by the consensus of the analysts' estimates? Consider this whole investment process as an Olympic diving match. The analysts are the judges, and they grade on many different inputs. The ones we care about are sales expectations, or the top line, and the earnings expectations, or the bottom line. Many people are fixated just on the top line, the revenues, as a way to judge whether a company is growing faster than the global economy or its own cohort.
I agree that the top line is a very important input. A company's stock will be walloped if it "misses" on the revenues. However, I think the bottom line is more important, and here's why: the earnings-what a company has left after it takes out the costs of all of those goods sold, expenses, taxes and depreciation-certainly need to please the analysts, but on top of that, bigger earnings can lead to bigger dividends, which are such a huge part of a stock's upside over time and can be traced to about 40 percent of a stock's long-term performance, dating back to the 1920s. Profits matter even in this new, crazy world, because profits can put dividend checks in your hand and help propel stocks higher over time due to those ever-increasing dividends. Thank heavens something remains true to the old days!