Earnings growth is the highest priority for any organization. This is because if the company doesn’t make money, it won’t last long. So, what’s earnings growth? Study a company’s revenues over a given period of time, subtract the cost of production, and you have earnings.
However, earnings acceleration works even better when it comes to lifting the stock price. Studies have shown that most successful stocks had seen an acceleration in earnings before an uptick in the stock price. Earnings acceleration 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.
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, but 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.
An increasing percentage of earnings growth means that the company is fundamentally sound and has been on the right track for a considerable period. 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.
Let’s look at stocks for which the last two quarter-over-quarter percentage EPS growth rates exceed the previous periods' growth rates. 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 6. Here are the top three stocks:
TORM ( TRMD Quick Quote TRMD - Free Report) is a carrier of refined oil products. TORM currently has a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth rate for the current year is 622.2%. You can see the complete list of today’s Zacks #1 Rank stocks here. Helmerich & Payne ( HP Quick Quote HP - Free Report) is engaged in the contract drilling of oil and gas wells in the U.S. and internationally. Helmerich & Payne currently has a Zacks Rank #2 (Buy). The company’s expected earnings growth rate for the current year is 89.2%. Murphy Oil ( MUR Quick Quote MUR - Free Report) is a global oil and gas exploration and production company. Murphy Oil currently has a Zacks Rank #2. The company’s expected earnings growth rate for the current year is 345.7%.
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Click here to sign up for a free trial to the Research Wizard today. 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.