Corporate earnings are expected to increase every year through at least 2019, while total Q3 earnings for the S&P 500 members are expected to rise 3.3% from the same period last year on 5% higher revenues. For this year, total earnings for the S&P 500 members are expected to increase 8.1% on 5% higher revenues, which would follow a paltry 0.7% earnings growth on 2.1% higher revenues last year (read more: Q3 Earnings Season Gets Underway).
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. Take a company’s revenues over a given period of time, subtract the cost of production and, there it is, you have earnings!
This metric is also considered to be the most significant variable in influencing the share price. Better-than-expected earnings performances normally lead to a rally in the share price. But, expectations of earnings also 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 happens because of the missing or beating of estimates.
Earnings estimates embody analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates serve as a valuable tool while making investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.
Investors, thus, should be on the lookout for stocks that are ready to make a big move. Hence, it is important for investors to buy stocks that have 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 added the following parameters:
Zacks Rank equal to 1 (Only Zacks' '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.) You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
5-Year Historical EPS Growth (%) greater than X-Industry (Stocks that possess strong EPS growth history.)
% Change EPS F(0)/F(-1) greater than or equal to 5 (Companies that witnessed year-over-year earnings growth rate 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 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 7,881 stocks to only 18. Here are the best five stocks:
Malibu Boats Inc MBUU is a designer, manufacturer and marketer of performance sport boats. The Zacks Consensus Estimate for its current-year earnings increased 2.2% over the last 60 days. The company’s expected earnings growth rate for the current and next quarters are 19.2% and 19.1%, respectively.
Meritor Inc MTOR is a supplier of a range of integrated systems, modules and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation and industrial sectors. The Zacks Consensus Estimate for its current-year earnings climbed 18.9% over the last 60 days. The company’s expected earnings growth rate for the current quarter is 31.6%.
Arista Networks Inc ANET is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. The Zacks Consensus Estimate for its current-year earnings rose 18.8% over the last 60 days. The company’s expected earnings growth rate for the current and next quarters are 45.1% and 19.9%, respectively.
JA Solar Holdings Co., Ltd. JASO designs, develops, manufactures and sells solar power products that convert sunlight into electricity for a range of uses. The Zacks Consensus Estimate for its current-year earnings skyrocketed more than 100% over the last 60 days. The company’s expected earnings growth rate for the current quarter is 20%.
Universal Display Corporation OLED is engaged in the research, development and commercialization of organic light emitting diode, technologies and materials for use in display and solid-state lighting applications. The Zacks Consensus Estimate for its current-year earnings rose 19.4% over the last 60 days. The company’s expected earnings growth rate for the current and next quarters are 400% and 43.6%, 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
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