As we are in the thick of the second-quarter earnings season, investors are on the lookout for stocks that are ready to make a significant jump. Generally, better-than-expected earnings growth leads to an upsurge in the share price. But why is this so? This is because earnings serve as the indicator of a company's profitability. Take a company's revenue over a given period of time, subtract the cost of production and, there it is, you have earnings!
In addition to actual earnings, here is another metric called earnings acceleration, which works even better in lifting the stock price. Studies have shown that the majority of successful stocks had seen acceleration in earnings before their positive price moves. So, what exactly is earnings acceleration?
Recognizing Future Outperformers
Earnings acceleration is basically incrementally growing earnings per share (EPS) of a company. Or, in other words, it is the increase in a company's quarter-over-quarter earnings growth within a stipulated frame of time.
As earnings acceleration considers both direction and magnitude of growth rates, it helps one to spot stocks that haven't caught the attention of the investors yet, which once secured will invariably lead to an uptick in the share price. But, if you pick a stock just on the basis of earnings growth then you are paying for something that has already been reflected in the stock price.
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. On the other hand, sideways percentage of earnings growth can potentially signal a period of consolidation or slowdown, while a decelerating percentage of earnings growth may at times send prices down.
Hence, earnings acceleration should be viewed as a key metric for share price outperformance.
Screening Parameters :
Let's look for stocks for which the last two quarter-over-quarter percentage EPS growth rates are more than the growth rates of the previous periods. The projected quarter-over-quarter percentage EPS growth rate is 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:
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 about 7,734 stocks to only 19. Here are the top five stocks:
Randgold Resources Ltd.GOLD is engaged in the gold mining, exploration and related activities. The company's estimated earnings growth rate for this year is 60%.
Acuity Brands, Inc.AYI comprises Acuity Lighting Group and Acuity Specialty Products. Acuity Brands is a provider of lighting solutions for commercial, institutional, industrial, infrastructure, and residential applications throughout North America and select international markets. The company's estimated earnings growth rate for this year is 41%.
Cheniere Energy, Inc.LNG is an energy company primarily engaged in liquefied natural gas (LNG) related businesses. The company's estimated earnings growth rate for this year is 53%.
Murphy Oil CorporationMUR is an oil and gas exploration and production company. The company's estimated earnings growth rate for this year is 55.6%.
LATAM Airlines Group SALFL offers domestic and international passenger and cargo air services. The company's estimated earnings growth rate for this year is more than 100%.
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.
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