Since we are in the thick of the earnings season, investors should look for stocks that are ready to make a big move. Upbeat earnings results are more often than not followed by an uptick in the share price. 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. Studies have shown that majority of successful stocks see acceleration in earnings before a positive stock price movement.
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.
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.
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.
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 27. Here are the top four stocks:
Dollar Tree, Inc. (DLTR - Free Report) operates variety retail stores in the United States and Canada. It operates through two segments, Dollar Tree and Family Dollar. Dollar Tree sports a Zacks Rank #1 (Strong Buy). The company’s estimated earnings growth rate for this year is 29.1%, higher than the industry’s projected addition of 14.2%.
Syndax Pharmaceuticals, Inc. (SNDX - Free Report) a clinical stage biopharmaceutical company, focuses on the development and commercialization of therapies for various cancer indications. Syndax Pharmaceuticals has a Zacks Rank #2 (Buy). The company’s estimated earnings growth rate for this year is 9.3%, ahead of the industry’s estimated gain of 6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Pinnacle Financial Partners, Inc. (PNFP - Free Report) operates as a bank holding company for Pinnacle Bank that provides various banking products and services in the United States. Pinnacle Financial Partners has a Zacks Rank #2. The company’s estimated earnings growth rate for this year is 15.6%, ahead of the industry’s projected addition of 6.4%.
Union Bankshares Corporation (UBSH - Free Report) operates as the bank holding company for Union Bank & Trust that provides banking and related financial services to consumers and businesses. Union Bankshares has a Zacks Rank #2. The company, which is part of the Banks - Southeast industry, is expected to yield a solid return of 5.1% this year.
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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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