Consistent earnings growth enthralls almost everyone, right from the top brass to research analysts. This is because earnings are a measure of the money a company is making. Take a company's revenues over a given period of time, subtract the cost of production and you will have its earnings!
Positive earnings results are more often than not followed by an uptick in the share price. 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.
Finding Future Outperformers
Basically, earnings acceleration is the incremental growth in earnings of a company. 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 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. In contrast, 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.
This is the reason why 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 22. Here are the top four stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Insight Enterprises, Inc.NSIT provides information technology (IT) hardware, software, and service solutions for small and medium sized firms. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings increased 10.6% over the last 60 days.
PetMed Express, Inc.PETS operates as a pet pharmacy in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 10.8% over the last 90 days. You can see the complete list of today's Zacks #1 Rank stocks here .
Avery Dennison CorporationAVY produces and sells pressure-sensitive materials worldwide. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 2.2% over the last 60 days.
TriplePoint Venture Growth BDC Corp.TPVG is an externally managed, closed-end, non-diversified management investment company. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 2.1% over the last 60 days.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.