Earnings growth captivates all and sundry, right from the top brass to research analysts. This is because earnings measure the extent of money a company is making. Notably, earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time.
However, earnings acceleration works even better when it comes to driving the stock price. Studies have shown that a majority of successful stocks saw acceleration in earnings before an uptick in the stock price.
Basically, earnings acceleration indicates incremental growth in a company's bottom line. In other words, if the rate of a company's quarter-over-quarter earnings growth increases within a stipulated frame of time, it can be referred to as earnings acceleration.
In case of higher earnings, you pay for something that is already reflected in the stock price. But earnings acceleration helps spot stocks that haven't caught the attention of investors yet, which once secured will invariably lead to a rally in the share price. This is because earnings acceleration considers both direction and magnitude of growth rates.
Rising percentage of earnings growth means that the company is fundamentally sound and has been on the right track for a considerable period of time. Meanwhile, a sideways percentage of improved earnings signifies a period of consolidation or slowdown while a decelerating percentage of earnings growth may at times drag prices down.
This is the reason why earnings acceleration should be viewed as a key metric for share price outperformance.
Let's look at the stocks for which the last two quarter-over-quarter percentage EPS growth rates exceed the same for the previous periods. The projected quarter-over-quarter percentage EPS growth rates are also expected to be higher than the prior periods' growth rates.
EPS % Projected Growth (Q1)/(Q0) Greater Than EPS % Growth (Q0)/(Q-1) : The projected growth rate for the current quarter (Q1) over the completed quarter (Q0) has to be greater than the growth rate from the completed quarter (Q0) over a quarter ago (Q-1).
EPS % Growth (Q0)/(Q-1) Greater Than EPS % Growth (Q-1)/(Q-2) : The growth rate for the completed quarter (Q0) over one quarter ago (Q-1) has to be greater than the growth rate from one quarter ago (Q-1) over couple of quarters ago (Q-2).
EPS % Growth (Q-1)/(Q-2) Greater Than EPS % Growth (Q-2)/(Q-3) : The growth rate from one quarter ago (Q-1) over two quarters ago (Q-2) has to be greater than the growth rate from two quarters ago (Q-2) over three quarters ago (Q-3).
In addition to this, we have added the following parameters:
Current Price Greater Than or Equal to $5 : This screens out low-priced stocks.
Average 20-Day Volume Greater Than or Equal to 50,000 : High trading volume implies the stocks to have adequate liquidity.
The above criteria narrowed the universe of around 7,735 stocks down to only 13. Here are the top four stocks:
McCormick & Company, IncorporatedMKC markets and distributes spices, seasoning mixes, condiments and other flavorful products to the food industry. The company currently has a Zacks Rank #2 (Buy). Its projected earnings growth rate for the current quarter and the year is 9.7% and 17.1%, respectively.
Helen of Troy LimitedHELE develops, imports, markets and distributes a portfolio of consumer products worldwide. Currently, the company sports a Zacks Rank #1 (Strong Buy). Its expected earnings growth rate for the ongoing year is pegged at 8.4%. You can see the complete list of today's Zacks #1 Rank stocks here .
Vale S.A.VALE produces and sells iron ore and iron ore pallets for use as raw materials in steelmaking across Brazil and internationally. The company currently has a Zacks Rank of 2. Its estimated earnings growth rate for the next quarter stands at 13.9%.
Raytheon CompanyRTN develops integrated products, services and solutions for defense and other government markets worldwide. Currently, the company is a Zacks #2 Ranked player. It's predicted earnings growth rate for the next quarter and the current year is 48.8% and 30.1%, each.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportHelen of Troy Limited (HELE): Free Stock Analysis ReportRaytheon Company (RTN): Free Stock Analysis ReportMcCormick & Company, Incorporated (MKC): Free Stock Analysis ReportVALE S.A. (VALE): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research