Right from the top brass to research analysts, earnings growth enthralls almost everyone. This is 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!
Upbeat earnings results are more often than not followed by an uptick in the share price. But, earnings acceleration works even better in boosting the stock price.
Earnings acceleration helps you select stocks that haven’t caught the attention of investors yet and consequently are on the verge of solid price appreciation. This is because earnings acceleration considers both direction and magnitude of growth rates. However, in case of earnings growth you pay for something that is already reflected in the stock price.
Increase in the percentage of earnings growth convinces us about the fundamental soundness of the company. A sideways percentage of earnings growth, on the other hand, indicates a period of consolidation or slowdown. If the earnings growth percentage moderates, share prices are more likely to tank.
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.
This is the reason why earnings acceleration should be viewed as a key metric for share price outperformance.
Let’s pick 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 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 7,676 stocks to only 24. Here are the top five stocks:
Insulet Corporation (PODD - Snapshot Report) develops, manufactures and sells insulin infusion systems for people with insulin-dependent diabetes in the United States. The company’s expected earnings growth for the current year is 62%.
Cliffs Natural Resources Inc. (CLF - Analyst Report) is a mining and natural resources company that produces and supplies iron ore. The company’s expected earnings growth for the current year is 231.5%.
NVIDIA Corporation (NVDA - Analyst Report) operates as a visual computing company worldwide. The company’s expected earnings growth for the current year is 71.5%.
Ultra Petroleum Corp. (UPLMQ - Analyst Report) is an independent oil and gas company, which engages in the acquisition, exploration, development, operation and production of oil and natural gas properties. The company’s expected earnings growth for the current year is 148.4%.
Pan American Silver Corp. (PAAS - Snapshot Report) , together with its subsidiaries, engages in silver mining and related activities. The company’s expected earnings growth for the current year is 185.5%.
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