It is well understood that revenue growth is a primary factor in earnings growth. As a wise investor once told me, “expense must head towards zero if a company is going to grow earnings without increasing sales.”
Finding revenue growth isn’t exactly easy, but it is only part of the equation that will result in a good stock pick. Once there is revenue growth, expenses must be held somewhat constant. If you have that, then earnings will grow as well and this is what investors love to see.
I screened all the Zack Rank #1 (Strong Buy) stocks for projected revenue growth of more than 35% and projected earnings growth of more than 35%.
Let’s take a look at 5 of the stocks that made it to this list.
Post Holdings Inc (POST) is the cereal maker that is expecting boxes to fly off the shelf this year. Analysts are calling for revenue growth of 92% and Earnings growth of 266%. Those are some huge numbers for what one might think to be a rather stable business.
I looked back and didn’t find any acquisition news of merit (a small deal for $90M won’t really move the needle of a company that is reporting $1B in quarterly sales). But this underscores the point of this screen, and that is this is only the first step in a due diligence process.
A much more reliable name that fits on the parameters of this screen is Facebook Inc (FB). The social media giant is a huge grower of revenues and earnings. Analysts are calling for revenue growth of 44% and EPS growth of 88%.
This type of revenue and earnings growth is just what aggressive growth investors are looking for.
Another tech stock that hits the list but is a good deal smaller than Facebook. Paylocity Holding Corp (PCTY) is based in suburban Chicago, and is a cloud based provider of payroll and human capital management.
PCTY is expected to post revenue growth of 41% and EPS growth of 69%. As a small cap stock this sort of growth is in line with what you would expect to see.
Paylocity is also a Zacks Rank #1 (Strong Buy) as earnings estimates for the current fiscal year have moved from a loss of 13 cents per share to a loss of 8 cents per share over the 7 days. Next fiscal year estimates have also risen from a loss of 4 cents per share to a loss of a 1 cent per share.
Investors love to see losses get smaller, and if things continue to improve for PCTY, then we could see fiscal 2017 be a profitable year.
There are two healthcare stocks that made the list with very similar revenue and earnings growth numbers.
Ani Pharmaceuticals Inc (ANIP) is a Zacks Rank #1 (Strong Buy) and analysts are calling for 36% revenue growth and 42% growth in EPS.
AMN Healthcare Services, Inc. (AHS) is slated to show 42% revenue growth and 36% EPS growth.
Summary: A Great Place to Start
This screen gives you some candidates to do more research on. You already know that earnings estimates are moving higher as they are all Zacks Rank #1 (Strong Buy) stocks, and that should be the foundation of all your research. Stocks that grow revenue and earnings at high rates have a strong likelihood of seeing share price appreciation over the coming months, but one cannot rely on the screen alone.
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Brian Bolan is a Stock Strategist for Zacks.com. He runs Stocks Under $10 Investor service where he looks for low priced stocks that are seeing positive earnings estimate revisions. This popular service has seen some strong early returns and offers a free trial via the Zacks Ultimate service.
Brian also runs the brand new Zacks Game Changers where he looks for stocks that are disrupting their industries and reaping big gains.
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