Earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time. Constant earnings growth interests almost everyone, right from the top brass to research analysts. This is because upbeat earnings serve as a indicator of a company’s profitability. It also more often than not leads to an uptick in the share price.
Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of stocks had seen acceleration in earnings before a rally in the stock price.
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.
Basically, earnings acceleration is the incremental growth in earnings of a company. 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 referred to 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.
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.
Zacks Rank less than or equal to 2 (Only Zacks' 'Buys' and 'Strong Buys' are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off.)
The above criteria narrowed down the universe of around 7,735 stocks to only nine. Here are the top four stocks.
Natus Medical Inc (BABY - Free Report) is a provider of newborn care and neurology healthcare products and services. The company has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings increased 2.4% over the last 60 days. The company’s estimated earnings growth rate for the current year is 7.1%.
GoPro Inc (GPRO - Free Report) produces cameras and mountable and wearable accessories. The company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings increased more than 100% over the last 60 days. The company’s estimated earnings growth rate for the current year is 103.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Enviva Partners LP (EVA - Free Report) is a supplier of utility-grade wood pellets to power generators. The company has a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings increased 3.5% over the last 60 days. The company’s estimated earnings growth rate for the next year is 82.9%.
Bruker Corporation (BRKR - Free Report) designs and manufactures scientific instruments, and analytical and diagnostic solutions. The company has a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings increased 5.4% over the last 60 days. The company’s estimated earnings growth rate for the next year is 12.4%.
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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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