Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings! Consistent earnings growth enthralls almost everyone, right from the top brass to research analysts. 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. Studies have shown that majority of successful stocks had seen acceleration in earnings before a positive stock price movement.
Finding Future Outperformers
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, which 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.
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.
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.
This is the reason why 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 7,885 stocks to only 19. Here are the top five stocks.
Potlatch Corporation (PCH - Free Report) is a real estate investment trust (REIT), which is primarily engaged in activities associated with timberland management. Potlatch has a Zacks Rank #1 (Strong Buy). The company’s estimated earnings growth rate for the current and next quarters are 27.2% and 38.1%, respectively.
CGI Group Inc (GIB - Free Report) directly or through its subsidiaries, manages information technology (IT) services, as well as business process services (BPS). The company has a Zacks Rank #2 (Buy). The company’s estimated earnings growth rate for the current and next quarters are 6.9% and 15.7%, respectively.
Cognex Corporation (CGNX - Free Report) is a provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. The stock has a Zacks Rank #1. The company’s estimated earnings growth rate for the current quarter is 72.1%.
Popular Inc (BPOP - Free Report) is a financial holding company. The company operates in two segments: Banco Popular de Puerto Rico (BPPR) and Banco Popular North America (BPNA). Popular has a Zacks Rank #2. The company’s estimated earnings growth rate for the current and next quarters are 9.3% and 18%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Independent Bank Corp (INDB - Free Report) is a bank holding company. The company operates through its subsidiary, Rockland Trust Company (the Bank). Independent Bank has a Zacks Rank #2. The company’s estimated earnings growth rate for the current and next quarters are 16.7% and 23%, respectively.
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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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