Right from the top brass to research analysts, earnings growth captivates all. This is because earnings are a measure of the money a company is making. Notably, earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time.
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.
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.
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.
This is the reason why 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 25. Here are the top five stocks:
Insight Enterprises, Inc. (NSIT - Free Report) provides information technology (IT) hardware, software, and service solutions for small and medium sized firms, enterprises, governments, schools, and health care organizations in the United States, Canada, Europe, the Middle East, Africa, and the Asia Pacific. The company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-year earnings rose 10.6% in the last 60 days.
PetMed Express, Inc. (PETS - Free Report) operates as a pet pharmacy in the United States. The company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings rose 6% in the last 60 days.
American Axle & Manufacturing Holdings, Inc. (AXL - Free Report) designs, engineers, validates, and manufactures driveline, metal forming, powertrain, and casting products. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings increased 3.8% in the last 60-day period. You can see the complete list of today’s Zacks #1 Rank stocks here.
Oil States International, Inc. (OIS - Free Report) provides oilfield products and services for the drilling, completion, subsea, production, and infrastructure sectors of the oil and gas industry worldwide. The company holds a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 23% in the last 60 days period.
Cannae Holdings, Inc. (CNNE - Free Report) is a principal investment firm. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 19% in the last 60 days.
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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.
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