At the onset of the Q1 earnings season, investors should look for stocks that are ready to make a big move. 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.
Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before an uptick in the stock price.
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.
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 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 18. Here are the top four stocks:
Abaxis, Inc. develops, manufactures, markets, and sells portable blood analysis systems for use in human or veterinary patient care settings to provide rapid blood constituent measurements for clinicians worldwide. Abaxis holds a Zacks Rank #1 (Strong Buy). The company’s expected growth rate for the next quarter is 28.6%.
Haynes International, Inc. (HAYN - Free Report) develops, manufactures, markets, and distributes nickel and cobalt-based alloys in sheet, coil, and plate forms in the United States, Europe, Asia, and internationally. Haynes International holds a Zacks Rank #2 (Buy). The company’s expected growth rate for the current and next quarters are 110% and 243.8%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
MakeMyTrip Limited (MMYT - Free Report) provides travel products and solutions in India and internationally. MakeMyTrip holds a Zacks Rank #2. The company’s expected growth rate for the next quarter is 20.8%.
Vectrus, Inc. (VEC - Free Report) provides facility and logistics, and information technology and network communication services to the U.S. government. Vectrus holds a Zacks Rank #1. The company’s expected growth rate for the next quarter is 55.1%.
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