The Difference Between Good Stocks and Great Stocks

In good markets or bad, strong earnings are one of the most important things that influence stock prices.

But instead of just looking at the most recent quarter’s earnings, try looking for earnings acceleration too.

Studies have shown that almost all of the most successful stocks in the past displayed accelerated earnings BEFORE their most impressive price moves.

Sideways ‘percentage earnings growth’ (even if they’re good) or decelerating ‘percentage earnings growth’ (strong or not) can potentially signal a period of consolidation (or slowdown) which in turn can flatten out prices or send them lower.

But increasing ‘percentage earnings growth’ (consistently improving from the company’s prior percentage of earnings growth) can often be the difference between good stocks and great stocks.

The Parameters

In this screen, I’m focusing on increasing ‘percentage earnings growth’ and projected ‘percentage earnings growth’.

I want each of the last two Quarter over Quarter % EPS Growth periods to be greater than the previous periods and the next two projected Quarter over Quarter % EPS Growth periods to be greater than the previous periods as well. (In addition to that, I’m only including stocks greater than or equal to $5 with daily share volume of 100,000 or more.)

(For quick reference, Q(0) = the completed quarter.
Q(-1) = the quarter prior to the completed quarter.
Q(-2) = 2 quarters prior to the completed quarter, and etc.
Moving in the other direction, Q(1) = the current quarter.
Q(2) = the next quarter, and etc.)

So the parameters would look like this;

• % Change Actual EPS Q(0)/Q(-1) > % Change Actual EPS Q(-1)/Q(-2)
  
• % Change Actual EPS Q(-1)/Q(-2) > % Change Actual EPS Q(-2)/Q(-3)
  
• Estimated EPS Growth Q(1)/Q(0) > % Change Actual EPS Q(0)/Q(-1)
  
• Estimated EPS Growth Q(2)/Q(1) > Estimated EPS Growth Q(1)/Q(0)
  
• Price >= $5
  
• Average Daily Volume >= 100,000

Here are three stocks from that list:

DFG Delphi Financial Group, Inc.
HIFN Hi/fn, Inc.
ICST Integrated Circuit Systems, Inc.

This screen is available in the Research Wizard by going to:

‘Screen’ on your Menu Bar
‘Open Screen Definition’
Double-clicking the ‘SoW’ folder
Selecting the file: sow_earnings_acceleration

So when a company reports earnings, take a look at their numbers, and then see how their current % EPS Growth stacks up to their previous period’s % EPS Growth (and the period prior to that). Moreover, take a look at how their Earnings Growth is forecasted in their next reporting period as well.

Again, with statistics suggesting that accelerated earnings typically appear BEFORE the most impressive price moves of a stock, this is definitely a screen worth watching for finding winning stocks on the move!!!

More on Earnings

Another screen I like running in regard to earnings, deals with Increasing Earnings (if not necessarily the % of EPS Growth).

Parameters

In this one I’m looking for each of last eight quarters of Earnings (that’s right -- eight quarters) to be greater than the previous quarter’s Earnings.

So the parameters would look like this;

• Quarterly EPS Q(0) > Quarterly EPS Q(-1)
  
• Quarterly EPS Q(-1) > Quarterly EPS Q(-2)
  
• Quarterly EPS Q(-2) > Quarterly EPS Q(-3)
  
• Quarterly EPS Q(-3) > Quarterly EPS Q(-4)
  
• Quarterly EPS Q(-4) > Quarterly EPS Q(-5)
  
• Quarterly EPS Q(-5) > Quarterly EPS Q(-6)
  
• Quarterly EPS Q(-6) > Quarterly EPS Q(-7)
  
• Quarterly EPS Q(-7) > Quarterly EPS Q(-8)

This one isn’t so much concerned with the increasing percentage of earnings growth, but rather, the simple increase of earnings from one period to another.

The thing that makes this screen so tough (i.e., a great stock picker) is that it demands a consistency of excellent performance from a company over an ‘extended’ period of time.

I also want this quarter’s Estimate Earnings to be greater than last quarter’s Actual Earning’s and the next quarter’s Estimated Earnings to be greater than this quarter’s Estimated Earnings.

• Q(1) Consensus Estimate > Q(0) Actual Quarterly EPS
  
• Q(2) Consensus Estimate > Q(1) Consensus Estimate

And

• Price >= $5
  
• Average Daily Volume >= 100,000

This strategy will typically find stocks with fantastic earnings consistency and a history of beating earnings expectations.

Here are three stocks from this list:

CVD - Snapshot Report Covance, Inc.
SWK - Analyst Report The Stanley Works
UNH - Analyst Report UnitedHealth Group, Inc.

This screen is also available in the Research Wizard. Go to;

‘Screen’ on your Menu Bar
‘Open Screen Definition’
Double-click the ‘SoW’ folder
Select the file: sow_increasing_earnings

All the Screen of the Week strategies are created and back-tested using the Research Wizard software from Zacks Investment Research. Learn more about the Research Wizard free trial offer and our new special report “Top 10 Stock Screening Strategies” Click here and find out how .

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.

Read the full analyst report on UNH

Read the full analyst report on SWK

Read the full analyst report on CVD

Read the full analyst report on DFG