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What Drives Stock Outperformance?

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Key Takeaways

  • Reaping market-beating gains is every investor's goal.
  • Strong sales growth, margin expansion, and innovation are all key for shares to outperform.
  • Near-term EPS revisions provide a clear near-term picture.

Investors are always on the hunt for stocks that deliver market-beating gains. Of course, finding big-time winners is much easier said than done, but investors can still deploy a basic framework that puts them on the path to reaping outsized returns.  

But what drives market outperformance?

Let’s take a closer look at a few common traits among companies delivering outsized gains over the past year.

Robust Sales Growth

Sales growth is vital for a company’s shares to outperform, as it’s the foundation of generating profits. Strong revenue generation allows companies to achieve scaling efficiencies, generate continuous shareholder value, and many other clear benefits.

A clear-cut example of this has been Palantir (PLTR - Free Report) over the last year, whose shares have climbed more than 750%. The company’s sales growth has been driven by the AI frenzy, posting double-digit percentage revenue growth rates in ten consecutive periods.

Below is a chart illustrating Palantir’s sales on a quarterly basis. Palantir’s sales outlook remains bullish, with the $3.9 billion Zacks Consensus estimate up nearly 20% over the last year.

Zacks Investment Research
Image Source: Zacks Investment Research

Margin Expansion

Margin expansion pleases the market, essentially letting investors know that a company is extracting more value from each dollar of sales. It indicates that a company is operating more efficiently, with better cost controls and other operational processes driving improved financial health.

Netflix (NFLX - Free Report) has enjoyed notable margin expansion over recent periods, with shares up 180% over the last year. Netflix overall continues to fire on all cylinders, regularly crushing our consensus expectations as of late.

Below is a chart illustrating Netflix’s margins on a trailing twelve-month basis.

Zacks Investment Research
Image Source: Zacks Investment Research

Innovation 

Innovation is crucial for a company to remain relevant, enabling it to maintain and expand its current market share. Broadcom (AVGO - Free Report) is an obvious example of this favorable development, whose innovation within artificial intelligence (AI) has launched shares higher over the past year.

Up nearly 200%, Broadcom shares have widely outperformed thanks to the above-mentioned innovation that’s been revealed in quarterly results. Broadcom has similarly enjoyed positive top and bottom line revisions like those above, with EPS expected to be up 37% on 21% higher sales in its current fiscal year.

Bottom Line

All investors look to reap outsized gains. When it comes to outperformance, robust sales growth, margin expansion, and innovation are all contributing factors.


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Netflix, Inc. (NFLX) - free report >>

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