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5 Stocks to Watch for Accelerating Earnings Growth

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Consistent earnings growth enthralls almost everyone, right from the top brass to research analysts. This is simply 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!

Better-than-expected earnings results mostly lead to an uptick in the share price. Studies, however, have shown that a majority of successful stocks had seen acceleration in earnings before a positive stock price movement. Hence, earnings acceleration works even better in driving stock price.

Finding Future Outperformers

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.

So, what is earnings acceleration? It is the incremental growth in a company’s earnings per share (EPS). 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 called earnings acceleration.

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, 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 7,885 stocks to only 13. Here are the top five stocks.

58.com Inc is a holding company. The company’s business consists of online classifieds and listing platforms. 58.com has a Zacks Rank #2 (Buy). The company’s estimated earnings growth rate for this year is 157.9%, ahead of the Internet - Software and Services industry’s earnings growth of 14.9%.

RPC, Inc. (RES - Free Report) is a holding company for several oilfield services companies. The company has a Zacks Rank #2. The company’s estimated earnings growth rate for this year is 194.2%, higher than the Oil and Gas - Field Services industry’s earnings growth of 32.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. Silica Holdings Inc (SLCA - Free Report) is a domestic producer of commercial silica, a specialized mineral that is an input into a range of end markets. The company has a Zacks Rank #3 (Hold). The company’s estimated earnings growth rate for this year is 404.9%, ahead of the Mining - Miscellaneous industry’s earnings growth of 9.8%.

Masimo Corporation (MASI - Free Report) is a medical technology company that develops, manufactures and markets a range of non-invasive patient monitoring technologies. The company has a Zacks Rank #3. The company’s estimated earnings growth rate for this year is 29%, higher than the Medical - Instruments industry’s earnings growth of 18.3%.

Manitowoc Company Inc (MTW - Free Report) is a provider of engineered lifting equipment for the construction industry. The company has a Zacks Rank #3. The company’s estimated earnings growth rate for this year is 31%, ahead of the Manufacturing - Construction and Mining industry’s earnings growth of 13.2%.

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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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