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 interests all. This is because upbeat earnings serve as an indicator of a company’s profitability. It also more often than not leads to an uptick in the share price.
Studies, however, have shown that a majority of successful stocks have seen acceleration in earnings before a positive stock price movement. Hence, earnings acceleration works even better in lifting 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.
Earnings acceleration helps spot stocks that haven’t caught the attention of investors yet, which once secured will invariably lead to an uptick in the share price. This is because earnings acceleration considers both direction and magnitude of growth rates. However, if you pick stocks just on the basis of earnings growth then you are paying for something that has already been reflected in the stock price.
Increase in the percentage of earnings growth convinces us about the fundamental soundness of the company. A sideways percentage of earnings growth, in the meanwhile, indicates a period of consolidation or slowdown. If the earnings growth percentage moderates, share prices are more likely to decline.
This is the reason why earnings acceleration should be viewed as a key metric for share price outperformance.
Let’s find out stocks for which the last two quarter-over-quarter percentage EPS growth rates are higher than 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 7,713 stocks to only three. Here are the stocks:
21Vianet Group Inc
(VNET - Free Report
) provides carrier and cloud-neutral Internet data center services. The company has a Zacks Rank #2 (Buy). The company’s expected earnings growth rate for the current quarter is 108.3%.
Ardmore Shipping Corporation
(ASC - Free Report
) engages in the seaborne transportation of petroleum products and chemicals worldwide. The company has a Zacks Rank #2. The company’s expected earnings growth rate for the current and next quarter is 760% and 335.3%, 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.