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We want to know about revenue growth, and we are also looking at what is called gross margin… or how much profitability each sale can generate… margins tell you how much of these revenues will turn into earnings… I mean you can sell your head off and not make any money… we are not interested in that… to figure out the gross margins… you want to check out the competition… look at how expensive the companies product is to make… look at the cost of doing business in general… Microsoft, for example, has incredibly high margins on its operating system because it is virtually a monopoly… there is not much competition… supermarkets though have bad margins… they face cut throat competition everywhere… the worst, airlines… you can only imagine.

Now, depending on the business… lots of things can happen to change the size of your margins… just look at what happened with the oil and natural gas companies… when prices spiked on high demand and low supply… the margins got really fat… as prices fell they slimmed down… now there are some kind of companies called cyclical companies… and we think of them… I want you to think of them as smoke stack companies, because cyclical sounds like something from the washing machine… their revenues and their margins fluctuate than what are called secular growth companies… the businesses that pretty much make the same amount of money no matter how strong the economy is… the price of Dove soap, or a can of Coca-Cola, or a box of cereal… it stays pretty much the same thing no matter what our GDP happens to be… these are secular growth companies.

When cyclical stocks start taking a beating… they are predicating a big economic down turn… they usually do it 6 months ahead… so when the cyclicals start losing revenues, when their margins start getting beaten up… you should be buying secular growth stocks… the ones that survive and thrive in a down turn… it is a tried and true formula for trying to make a lot of money… now look if you diversify you can own cyclical and secular growth… that might be the way to do it if you can’t pay that much attention… but when the economy is weak, you should be reaching for Kellogg and Coke… but you only know the economy is weak because say you listened to the Whirlpool conference call and they say, oh boy we can’t sell these washing machines or dryers… that is why you do homework… so you can understand how individual stocks look… and so you can understand what those individual stocks tell you about the market as a whole.

Remember, half of the stocks forward performance can be predicated by what sector it is in… its neighborhood… so it is important to know what moves various sectors and how they do in various economic circumstances… that is why I use my 10 point scale to compare companies in the same company… they can earn up to 5 points, 5 total points for the sector, because it controls half of their performance… but we are not just looking at the macro picture when we do homework… we are especially looking at industry specific key metrics… to tell you how a company is doing compared to its peers… that along with things like dividends and buy backs are where I award the other 5 points… remember, that proprietary Mad Money 10 point scale, we break it out all the time.

For example, when we are looking at cable companies… what is the key metric there… Wall Street uses an enterprise value divided by the number of subscribers… enterprise value is just market cap plus its debt… it is jibberish, right… it is what a company would cost if another company were to acquire it… how about hotels… the key metric there is the average revenue per room, rev par… for wireless providers it is average revenue for user, rev pu… for retailers, the key metric is same stores, same stores sales, ss… you measure restaurants by same store sales… you just look at total revenues for a retailer or a restaurant, that does not help… because look if it is total revenues, they just put up more stores and it looks like they are doing well… it doesn’t tell you how well the core business is growing… that is why you compare store by how it did the next year… for tech stocks, you want to look at gross margins per product sold… that is the metric there… for financials, you look at the net interest margin, or how much money was made on each dollar that the bank, insurance company, or savings and loan had in assets if they pay you as a depositor x, and they make a loan at 3x, well they are making 2x… net interest margin.

Once you know how a company measures up on its key metrics… you look at how it compares to its competitors… usually the companies with the best numbers are best of breed… and deserve a premium evaluation… they should have price to earnings multiples that are higher relative to their growth rates than what their competitors get.

Here is the bottom line about all of this...