Why is everyone, right from the top brass to research analysts, excited about earnings? This is simply because earnings are a measure of the money a company is making. In other words, take a company’s revenue over a given period of time, subtract the cost of production and, there it is, you have earnings! It not only determines how affluent the company’s shareholders are, but also influences a company’s share price. Better-than-expected earnings results mostly lead to an uptick in the share price.
In addition to actual earnings, here is another metric called earnings acceleration, which works even better in lifting the stock price.
Spot Future Outperformers with Earnings Acceleration
Earnings acceleration is basically the increase in a company’s quarter-over-quarter earnings growth within a stipulated frame of time. In other words, it is the incremental growth in earnings per share of a company.
But why is it better than earnings growth? This is because in case of earnings acceleration you select stocks that haven’t caught the attention of investors yet and consequently are on the verge of price appreciation. Earnings acceleration considers both the direction and the magnitude of growth rates. Conversely, in case of earnings growth you pay for something that has already been reflected in the stock price.
More often than not the difference between good stocks and great stocks is determined by the increase in the percentage of earnings growth. This makes us believe that the company is in sound shape and has been on the right track for a consistent period of time. On the other hand, sideways percentage of earnings growth can potentially signal a period of consolidation or slowdown, while a decelerating percentage of earnings growth may at times send prices down.
Hence, investment in stocks having solid earnings acceleration is a profitable strategy.
The Winning Strategy
Let’s look for stocks for which the last two quarter-over-quarter percentage EPS growth rates are more 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 about 7,749 stocks to only 8. Here are the top 5 stocks:
Hexcel Corp. HXL develops, manufactures and markets structural materials for use in commercial aerospace, space and defense, and industrial markets. The company’s expected earnings growth for the current year is 7.7%.
T2 Biosystems, Inc. TTOO, an in vitro diagnostics company, develops diagnostic products and product candidates in the United States. The company’s expected earnings growth for the current year is 3.6%.
Randgold Resources Limited GOLD explores for and develops gold deposits in Sub-Saharan Africa. It holds interests in the Morila gold mine, the Loulo gold mine and the Gounkoto gold mine, which are located in Mali, West Africa. The company’s expected earnings growth for the current year is 46.4%.
Broadridge Financial Solutions, Inc. BR provides investor communications and technology-driven solutions for the financial services industry in the United States, Canada, the United Kingdom and internationally. The company’s expected earnings growth for the current year is 10.5%.
Dynamic Materials Corp. BOOM operates in the energy, industrial, and infrastructure markets worldwide. The company operates in two segments, NobelClad and DynaEnergetics. The company’s expected earnings growth for the current year is more than 100%.
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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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