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Constant earnings growth captivates almost everyone, right from the top brass to research analysts. This is because earnings are a measure of the 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.
Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before an uptick in the stock price.
So, what is earnings acceleration? It is the incremental growth in a company's earnings per share (EPS). 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 called earnings acceleration.
In case of earnings growth, 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.
Increasing 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 earnings growth indicates a period of consolidation or slowdown, while a decelerating percentage of earnings growth may at times drag prices down.
Hence, earnings acceleration should be viewed as a key metric for share price outperformance.
The Winning Strategy
Let's look at stocks for which the last two quarter-over-quarter percentage EPS growth rates exceed the growth rates of the previous periods. The projected quarter-over-quarter percentage EPS growth rates are also expected to be higher than the previous 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 one 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 two 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 the low-priced stocks.
Average 20-day volume greater than or equal to 50,000 : High trading volume implies that the stocks have adequate liquidity.
The above criteria narrowed down the universe of around 7,735 stocks to only 17. Here are the top four stocks:
Plains All American Pipeline (NYSE: PAA ) engages in the transportation, storage, terminalling, and marketing of crude oil, natural gas liquids (NGL), and natural gas in the United States and Canada. The company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings moved up 22.1% over the last 60 days.
Regional Management Corp (NYSE: RM ), a diversified consumer finance company, provides various loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased almost 1% over the last 60 days.
AutoZone (NYSE: AZO ) retails and distributes automotive replacement parts and accessories. The company has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its current-year earnings rose 1.8% over the last 60 days.
Fifth Third Bancorp (NASDAQ: FITB ) operates as a diversified financial services company in the United States. The company has a Zacks Rank #3. The Zacks Consensus Estimate for its current-year earnings advanced 0.4% over the last 60 days.
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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.
Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance
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