THE " SMART " COMPANIES.

What is a leader? Someone with internal and external strength. Someone who is great in a particular field, stands out from the rest and leads the way. George Washington. Abraham Lincoln. Winston Churchill.

Stocks are the same way. Think of some of the earth-shattering performances over the decades. IBM, (IBM) Dell, (DELL) Yahoo, (YHOO) Home Depot, (HD) Microsoft, (MSFT) Apple. (AAPL)

Remember when coffee shops were famous for serving awful coffee? That was before Starbucks (SBUX) worked that niche into a $12 billion company.

A market leader must do more than make money. It must grow its bottom line at an outstanding rate, demonstrating its muscle also with superior sales growth, return on equity, profit margins and cash flow.

What's a stock worth when the company earns $1 a share? That depends. What did it earn last year? What are expectations for the full fiscal year?

If the company has been stuck at $1 a share, and will stay stuck for years, then the stock won't be worth any more than a steady stream of $1 bills.

Let's look at another $1-a-share listing. It earned 33 cents last year, 2 cents the year before that. The current year? Analysts expect $2.50. That stock will be worth a lot more.

How can a company grow its profit so much that it creates a frenzy in the stock market?

Usually by producing a better product or service. By finding a new gizmo that everyone must have. Or by doing or making an old thing in a better way.


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Sometimes, economic or industry conditions change dramatically. For example, fertilizer makers have flourished as corn and other crop prices swell on global demand for food, feed and ethanol.

IBD never tells you what stocks to buy. But it does introduce readers to a wealth of companies that may fit the bill in features such as the IBD 100, Stocks In The News and The New America.

Find a company producing superior financials and chances are it has come out with an innovative — or perhaps blockbuster — product or service.

What of those two stocks that earn $1 a share? Flatliners have low price-earnings ratios. If one were BCE, (BCE) a Canadian telecom, that stock would be trading at 15 a share.

If the other were, say, BlackBerry maker Research In Motion, (RIMM) you'd be looking at a P/E of 61. Solar power leader First Solar (FSLR) : 156. So don't let "high" P/E ratios keep you away from a winner.

Leading stocks earn the respect of institutional investors, and that's reflected in ownership by mutual funds, insurers and other major players. A stock of institutional quality will show it by making well-crafted bases and sustained advances