Unwavering earnings growth enthrals all, the top brass to research analysts. This is because earnings are a measure of the money a company is making. Notably, earnings are basically revenues that the company generates after deducting the cost of production over a given period of time.
Earnings acceleration, in the meanwhile, works even better when it comes to lifting the stock price. Studies have revealed that a majority of successful stocks had seen acceleration in earnings before an uptick in the stock price.
Basically, earnings acceleration is the incremental growth in earnings of a company. 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 referred to as earnings acceleration.
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.
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. Meanwhile, 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.
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 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 7,735 stocks to only 22. Here are the top three stocks:
Eni S.p.A. ( E Quick Quote E - Free Report) engages in the exploration, development, and production of crude oil and natural gas. The company currently has a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth rate for the next five-year period is 22.1%. You can see the complete list of today’s Zacks #1 Rank stocks here. Exxon Mobil Corporation ( XOM Quick Quote XOM - Free Report) explores for and produces crude oil and natural gas in the United States and internationally. The company currently has a Zacks Rank #2 (Buy). The company’s expected earnings growth rate for the next five-year period is 6.3%. LPL Financial Holdings Inc. ( LPLA Quick Quote LPLA - Free Report) provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions in the United States. The company currently has a Zacks Rank #2. The company’s expected earnings growth rate for the current year is 9.9%.
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