Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings! 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. Upbeat earnings results are more often than not followed by an uptick in the share price.
But earnings acceleration works even better in boosting the stock price. Studies have shown that majority of successful stocks see acceleration in earnings before a positive stock price movement.
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.
The Winning Strategy
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 the 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 six. Here are the top three stocks:
Lexicon Pharmaceuticals, Inc. (LXRX - Free Report) is a biopharmaceutical company that focuses on the development and commercialization of pharmaceutical products. The company has a Zacks Rank #3 (Hold). The company’s expected earnings growth for the current and next quarter is 9.7% and 47.5%, respectively.
Medtronic plc (MDT - Free Report) develops, manufactures, distributes, and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. The company has a Zacks Rank #3. The company’s expected earnings growth rate for the current quarter and year is 3.3% and 8%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
NetApp, Inc. (NTAP - Free Report) provides software, systems, and services to manage and share data on-premises, and private and public clouds worldwide. The company has a Zacks Rank #3. The company’s expected earnings growth rate for the current quarter and year is 20.2% and 35%, respectively.
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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