Investors are always on the lookout for stocks that are ready to make a big move. Better-than-expected earnings, more often than not, lead to an uptick in shares. Consistent earnings growth enthralls almost everyone, right from the top brass to research analysts. 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! But, earnings acceleration works even better in boosting the stock price.
Finding Future Outperformers
If you pick stocks just on the basis of earnings growth then you are paying for something that has already been reflected in the stock price. However, steady earnings acceleration helps you select stocks that haven’t caught the attention of investors yet and are consequently on the verge of solid price appreciation. This is because earnings acceleration considers both direction and magnitude of growth rates.
Earnings acceleration is basically incrementally growing 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.
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.
Let’s find 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 7,811 stocks to only 30. Here are the top four stocks:
Lancaster Colony Corporation (LANC - Free Report) manufactures and markets specialty food products for the retail and foodservice markets. The company’s expected growth rate for the current year is 7.3%. The Zacks Consensus Estimate for its current year earnings rose 3.5% over the last 60 days.
Sucampo Pharmaceuticals, Inc. is a biopharmaceutical company that focuses on the research and development of proprietary drugs for the treatment of gastrointestinal, ophthalmic, autoimmune, and oncology-based inflammatory disorders. The company’s expected growth rate for the current year is 23.2%. The Zacks Consensus Estimate for its current year earnings scaled 18.4% over the last 60 days.
VMware, Inc. (VMW - Free Report) provides virtualization and cloud infrastructure solutions. The company’s expected growth rate for the current year is 2.7%. The Zacks Consensus Estimate for its current year earnings increased 1.3% over the last 60 days.
Alexandria Real Estate Equities, Inc. (ARE - Free Report) is a real estate investment trust (REIT). The company’s expected growth rate for the current year is 5.2%. The Zacks Consensus Estimate for its current year earnings advanced 0.14% over the last 90 days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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