Take a company’s revenues over a given period of time, deduct production cost and you will have earnings! Earnings growth interests all, right from the top brass to research analysts. And why not? If the company doesn’t make money, it won’t be able to stand the test of time.
This metric is also considered a key variable in influencing share price. But expectations of earnings also play a significant role here.
Earnings Estimates Shape Share Prices
We have often seen a decline in the stock price despite earnings growth and a rally in the price following an earnings decline. This is largely a result of a company’s earnings failing to meet market expectations.
Earnings estimates embody analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates serve as a valuable tool while taking investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.
As the earnings season is just around the corner, investors should be on the lookout for stocks that are ready to make a big move. Hence, it is important to invest in stocks that have historical earnings growth and are also seeing a rise in quarterly and annual earnings estimates.
The Winning Strategy
In order to shortlist stocks that have striking earnings growth and positive estimate revisions, we have added the following parameters:
Zacks Rank less than or equal to 2 (Only Zacks Rank Buy and Strong Buy 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.)
5-Year Historical EPS Growth (%) greater than X-Industry (stocks with a strong EPS growth history).
% Change EPS F(0)/F(-1) greater than or equal to 5 (companies that saw year-over-year earnings growth of 5% or more in the last reported fiscal).
% Change Q1 Estimates over the last 4 weeks greater than zero (stocks that have seen their current quarter earnings estimates revised higher in the last 4 weeks).
% Change F1 Estimates over the last 1 week greater than zero (stocks that have seen their annual earnings estimates revised higher in the last 1 week).
% Change F1 Estimates over the last 4 weeks greater than zero (stocks that have seen their annual earnings estimates being revised higher in the last 4 weeks).
The above criteria narrowed down the universe of around 7,839 stocks to only five. Here are the stocks:
LHC Group, Inc. (LHCG - Free Report) is a health care provider that specializes in the post-acute continuum of care primarily for Medicare beneficiaries in the United States. The company has a Zacks Rank #2 (Buy). The company’s estimated growth rate for this year is 44.6%, compared with the industry’s projected gain of 21.1%.
Steel Dynamics, Inc. (STLD - Free Report) engages in steel products manufacturing and metals recycling businesses in the United States and internationally. The company has a Zacks Rank #2. The company’s estimated growth rate for this year is 56.8% versus the industry’s estimated gain of 28.4%.
Zebra Technologies Corporation (ZBRA - Free Report) designs, manufactures, and sells a range of automatic identification and data capture products worldwide. The company sports a Zacks Rank #1 (Strong Buy). The company’s estimated growth rate for this year is 35.6%, higher than the industry’s expected gain of 29.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Landstar System, Inc. (LSTR - Free Report) provides integrated transportation management solutions in the United States, Canada, Mexico, and internationally. The company has a Zacks Rank #2. The company, which is part of the Transportation - Truck industry, is expected to give a solid return of 40.5% this year.
Science Applications International Corporation (SAIC - Free Report) provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. The company has a Zacks Rank #1. The company, which is part of the Computers - IT Services industry, is expected to yield a steady return of 15.6% 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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