Earnings are perhaps the most significant metric for an organization. Substantial earnings growth indicates the affluence of a company. Earnings are essentially revenues that the company makes after subtracting cost of production over a given period of time. Upbeat earnings results generally lead to an increase in the share price.
But instead of looking only at the most recent quarter’s earnings, one should also focus on earnings acceleration. And why is this so? It’s because earnings acceleration works even better in lifting the stock price.
Spotting Future Outperformers
Earnings acceleration is basically incrementally growing earnings per share (EPS) of a company. In other words, if the rate of a company’s quarter-over-quarter earnings growth increases over a considerable period, it can be called earnings acceleration.
Moreover, picking stocks on the basis of earnings growth will lead you to pay for something that is already reflected in the stock price. However, earnings acceleration will help you to select stocks that have yet to see significant investor attention and the consequent solid price increase. This is because earnings acceleration considers both direction and magnitude of growth rates.
Increasing the percentage of earnings growth can often be the difference between good stocks and great stocks. It means that the company is basically sound and has been on the right track for a sustained 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, investment in stocks having solid earnings acceleration is a profitable strategy.
The Winning Strategy:
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.
Here are five of the 13 stocks that made it through the screen:
Microchip Technology Inc. ( (NASDAQ:MCHP) )
Randgold Resources (LON:RRS) Limited ( (NASDAQ:GOLD) )
Broadridge Financial Solutions, Inc. ( (NYSE:BR) )
Commerce Bancshares, Inc. ( (NASDAQ:CBSH) )
Hexcel Corp. ( (NYSE:HXL) )
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.
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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: http://www.zacks.com/performance
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HEXCEL CORP (HXL): Free Stock Analysis Report
COMMERCE BANCSH (CBSH): Free Stock Analysis Report
RANDGOLD RSRCS (GOLD): Free Stock Analysis Report
MICROCHIP TECH (MCHP): Free Stock Analysis Report
BROADRIDGE FINL (BR): Free Stock Analysis Report
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Zacks Investment Research