Declining Earnings

Shareholders can be a company's biggest fans and most forgiving critics — but that can cost us. Consider: Which of the following stocks is expected to post lower earnings this fiscal year — Microsoft, Target, Carnival or Adobe Systems?

It can't be Microsoft, right? (Microsoft is a Motley Fool Inside Value recommendation.) It must be profiting greatly as the global computing population grows. Target? No way. The "cheap chic" message is resonating well these days, as departmentstore shoppers trade down to more affordable fashions. Carnival is the top dog in the cruising industry, a travel niche growing as bigger and better boats are christened. Adobe is the leader in desktop publishing software, with several ubiquitous brands such as Photoshop, Acrobat and Flash.

Well, it was a trick question. The correct answer is all of the above. Microsoft is struggling through a slowdown of Vista orders, as users wait for the company's new operating system. Target is being challenged by more upscale chains playing the value card. Carnival is benefiting from lower fuel prices this summer, but weak discretionary income is forcing it to discount cabins to fill its ships. Adobe's showing signs of cracking, blaming recent shortcomings on the environment for its creative and knowledge-worker businesses.

It's up to you to determine whether you're looking at a temporary stumble or the beginning of a gradual decline in relevance. In 2005, Circuit City was the country's second-largest consumer electronics chain, growing in reach and rejecting its second buyout offer in three years. But its earnings were going away. And earlier this year, so did Circuit City, in the mother of all liquidations.

Now that's unlikely to happen with the four stocks above, but you never know where one bad step backward will lead. So keep a close eye on any of your companies that have declining earnings. Because if earnings continue to fall, so will stock prices. Don't forgive your stocks all the way to zero.

OOPS DEPT.: We recently wrote that McDonald's has been paying dividends since 1937. Make that 1976.