Since we are in the thick of the earnings season, investors should look for stocks that are ready to make a big move. Better-than-expected earnings results mostly lead to an uptick in the share price. Earnings growth, moreover, enthralls almost everyone, right from the top brass to research analysts. But the question here is why? This is simply because earnings are a measure of the money a company is making. Notably, earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time.
Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before a positive stock price movement.
Spotting Future Outperformers
Earnings acceleration is nothing but incrementally growing earnings per share (EPS) of a company. In other words, if the rate of a company’s quarter-over-quarter earnings growth increases over a considerable period, it is termed as earnings acceleration.
If you pick a stock just by focusing on the company’s earnings growth trajectory then you are paying for something that has already been reflected in the stock price. Earnings acceleration, on the other hand, considers both direction and magnitude of growth rates. This helps you in picking stocks that are yet to gain significant attention from investors, and consequently a solid price increase is still in the cards.
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 nosedive.
Hence, 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 7,735 stocks to only 28. Here are the top five stocks:
Lancaster Colony Corporation (LANC - Free Report) manufactures and markets specialty food products for the retail and foodservice markets in the United States. The company’s estimated earnings growth rate for this year is 5.3%.
Stratasys Ltd. (SSYS - Free Report) provides three-dimensional (3D) printing and additive manufacturing (AM) solutions. The company’s estimated earnings growth rate for this year is 5.3%.
Citrix Systems, Inc. (CTXS - Free Report) develops and sells products and services that enable delivery of applications and data over public, private, or hybrid clouds or networks to various types of devices. The company’s estimated earnings growth rate for this year is 16.1%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
VMware, Inc. (VMW - Free Report) provides virtualization and cloud infrastructure solutions in the United States and internationally. The company’s estimated earnings growth rate for this year is 2.9%.
Alexandria Real Estate Equities, Inc. (ARE - Free Report) a real estate investment trust (REIT), engages in the ownership, operation, management, development, acquisition and redevelopment of properties for the life sciences industry. The company’s estimated earnings growth rate for this year is 5.1%.
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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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