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 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.
So, what does earnings estimates symbolize? Earnings estimates embody analysts’ opinion of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates are a valuable tool for investors. Analysts can also examine the cash flow based on these periodic earnings estimates to determine the fair value of a company.
Here, we have picked stocks that have displayed 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 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 revised higher in the last 4 weeks).
The above criteria narrowed down the universe of around 7,839 stocks to only 11. Here are the top four stocks:
Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) operates as a retailer of brand name merchandise. The company has a Zacks Rank #2 (Buy). The company’s estimated earnings growth rate for this year is 36.8%, higher than the Consumer Products - Staples industry’s gain of 5.2%.
RH (RH - Free Report) operates as a retailer in the home furnishings. The company has a Zacks Rank #1 (Strong Buy). The company’s estimated earnings growth rate for this year is 115.7%, higher than the Retail - Home Furnishings industry’s gain of 20.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celanese Corporation (CE - Free Report) is a technology and specialty materials company. The company has a Zacks Rank #2. The company’s estimated earnings growth rate for this year is 26.6%, higher than Chemical - Diversified industry’s gain of 20.7%.
NCI Building Systems, Inc. (NCS - Free Report) designs, engineers, manufactures, and markets metal products for the nonresidential construction industry in North America. The company has a Zacks Rank #1. The company’s estimated earnings growth rate for this year is 77.5%, higher than Building Products - Miscellaneous industry’s gain of 25.2%.
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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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