The highest priority among the top brass in any organization is to secure earnings growth on a year-over-year basis. And why is this so? It’s because earnings growth indicates the affluence of a company. Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings!
This metric is also considered the most significant variable in influencing the share price. Better-than-expected earnings performances normally lead to a rally in the share price. However, in addition to actual earnings, expectations of earnings play a vital role in determining share price movement.
Earnings Estimates Determine Share Prices
We have often seen a decline in the stock price despite earnings growth and a rally in the price following an earnings decline. This happens because of the missing or beating of estimates.
Earnings estimates embody analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates serve as a valuable tool while taking investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.
Hence, it is important for investors to buy stocks that have historical earnings growth and are also seeing a rise in quarterly and annual earnings estimates.
The Winning Strategy
In order to shortlist stocks that have striking earnings growth and positive estimate revisions, we added the following parameters:
Zacks Rank less than or equal to 2 (Only Zacks' 'Buys' and 'Strong Buys' are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off.)
5-Year Historical EPS Growth (%) greater than X-Industry (Stocks that possess strong EPS growth history.)
% Change EPS F(0)/F(-1) greater than or equal to 5 (Companies that witnessed year-over-year earnings growth rate of 5% or more in the last reported fiscal.)
% Change Q1 Estimates over the last 4 weeks greater than zero (Stocks that have seen their current quarter earnings estimates revised higher in the last 4 weeks.)
% Change F1 Estimates over the last 1 week greater than zero (Stocks that have seen their annual earnings estimates revised higher in the last 1 week.)
% Change F1 Estimates over the last 4 weeks greater than zero (Stocks that have seen their annual earnings estimates revised higher in the last 4 weeks.)
The above criteria narrowed down the universe of around 7,818 stocks to only 15. Here are the top five stocks:
Applied Optoelectronics Inc (NASDAQ:AAOI) is a vertically integrated provider of fiber-optic networking products, primarily for networking end markets, such as Internet data center, cable television (CATV), fiber-to-the-home (FTTH) and telecommunications (telecom). The company sports a Zacks Rank #1 (Strong Buy).
The Zacks Consensus Estimate for its current year earnings soared 37.6% over the last 60 days. The company’s estimated earnings growth rate for this year is 269.4%, more than the Electronics - Semiconductors industry’s expected gain of 5.9%.
Arista Networks Inc (NYSE:ANET) is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. The company has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for its current year earnings increased 4.8% over the last 60 days. The company’s estimated earnings growth rate for this year is 18.7%, higher than the Communication - Components industry’s expected gain of 11.8%.
Ulta Beauty Inc (NASDAQ:ULTA) is a holding company for the Ulta Beauty group of companies. The company is a beauty retailer and has a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for its current year earnings improved 0.2% over the last 60 days. The company’s estimated earnings growth rate for this year is 23.2%, higher than the Retail - Miscellaneous industry’s expected gain of 14%.
Western New England Bancorp Inc (NASDAQ:WNEB) is a provider of banking products and services to business organizations and individuals, including products such as residential and commercial loans, consumer loans and a variety of deposit products. Western New England Bancorp has a Zacks Rank #2.
The Zacks Consensus Estimate for its current year earnings rose 11.8% over the last 60 days. The company’s estimated earnings growth rate for this year is 40.2%, more than the Banks - Foreign industry’s expected gain of 6%.
CU Bancorp (NASDAQ:CUNB) is a full-service commercial bank offering a range of banking products and services designed for small and medium-sized businesses, non-profit organizations, business owners and entrepreneurs, and the professional community. The company has a Zacks Rank #2.
The Zacks Consensus Estimate for its current year earnings increased 1.7% over the last 60 days. The company’s estimated earnings growth rate for this year is 18.7%, higher than the Banks - West industry’s expected gain of 13.4%.
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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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Arista Networks, Inc. (ANET): Free Stock Analysis Report
Western New England Bancorp (WNEB): Free Stock Analysis Report
CU Bancorp (CA) (CUNB): Free Stock Analysis Report
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
Ulta Beauty Inc. (ULTA): Free Stock Analysis Report
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Zacks Investment Research