Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings! Earnings growth enthralls almost everyone, right from the top brass to research analysts. And why not? If the company doesn’t make money, it won’t last over the long haul.
This metric is also considered a key variable in influencing the share price. Better-than-expected earnings performances normally lead to a rally in the share price. However, in addition to actual earnings, expectations of earnings play a significant role in influencing the price of a stock.
Earnings Estimates Determine Share Price
We have often seen a decline in stock price despite earnings growth and a rally in 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 making investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.
Investors, thus, should be on the lookout for stocks that are ready to make a big move. Hence, it is important for investors to buy 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' '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.)
5-Year Historical EPS Growth (%) greater than X-Industry (Stocks that possess strong EPS growth history.)
% Change EPS F(0)/F(-1) greater than or equal to 5 (Companies that witnessed year-over-year earnings growth rate 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 revised higher in the last 4 weeks.)
The above criteria narrowed down the universe of around 7,818 stocks to only 11.
Here are the top four stocks:
Celanese Corporation (CE - Free Report) manufactures and sells value-added chemicals, thermoplastic polymers, and other chemical-based products worldwide. The company carries a Zacks Rank #2 (Buy). Its estimated growth rate for this year is 25.9%, higher than the Chemical - Diversified industry’s rise of 19.2%.
Steel Dynamics, Inc. (STLD - Free Report) engages in the steel products manufacturing and metals recycling businesses in the United States and internationally. The company has a Zacks Rank #2. Its estimated growth rate for this year is 89.1%, higher than the Steel - Producers industry’s increase of 12.8%.
Adobe Systems Incorporated (ADBE - Free Report) operates as a diversified software company worldwide. The company carries a Zacks Rank #2. Its estimated growth rate for this year is 53.6%, higher than the Computer - Software industry’s rally of 13.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northrop Grumman Corporation (NOC - Free Report) operates as a security company for government and commercial customers worldwide. The company sports a Zacks Rank #1 (Strong Buy). Its estimated growth rate for this year is 24.8%, higher than the Aerospace - Defense industry’s increase of 13.9%.
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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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