Earnings growth enthralls almost everyone, right from the top brass to research analysts. But the question here is why? If the company doesn’t make money, it won’t stand the test of time. Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings!
This metric is also considered to be the most noteworthy variable in influencing the share price. Better-than-expected earnings performances normally lead to a rally in the share price. However, in addition to actual earnings, expectations of earnings 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 is largely a result of a company’s earnings failing to meet market expectations.
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 have added the following parameters:
Zacks Rank less than or equal to 2 (Only Zacks’ ‘Buys’ and ‘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 1 week greater than zero (Stocks that have seen their annual earnings estimates revised higher in the last 1 week.)
% 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 7,818 stocks to only 23. Among them, we have selected five large-cap stocks. Such stocks have long-term performance history and are more stable than what mid-caps or small caps offer. Companies with market capitalization of more than $10 billion are generally considered large cap.
Here are the top five stocks:
Facebook Inc (NASDAQ:FB) is focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The company’s products include Facebook, Instagram, Messenger, WhatsApp and Oculus. Facebook has a Zacks Rank #2 (Buy). The company’s estimated growth rate for this year is 26.5%, higher than the industry’s gain of 13.7%.
NVIDIA Corporation (NASDAQ:NVDA) focuses on personal computer (PC) graphics, graphics processing unit (GPU) and also on artificial intelligence (AI). The company operates through two segments: GPU and Tegra Processor. NVIDIA has a Zacks Rank #1 (Strong Buy). The company’s estimated growth rate for this year is 40.5%, higher than the industry’s gain of 24.8%.
Principal Financial Group Inc (NYSE:PFG) is an investment management company. The company offers a range of financial products and services, including retirement, asset management and insurance. Principal Financial has a Zacks Rank #2. The company’s estimated growth rate for this year is 14.4%, higher than the industry’s gain of 8.1%.
A. O. Smith Corp (NYSE:AOS) manufactures and markets residential and commercial gas, electric water heaters, and water treatment products in North America, China, Europe, and India. The company has a Zacks Rank #2. The company’s estimated growth rate for this year is 14%, higher than the industry’s gain of 6.6%.
Lincoln National Corporation (NYSE:LNC) is a holding company, which operates insurance and retirement businesses through subsidiary companies. The company has a Zacks Rank #2. The company’s estimated growth rate for this year is 14.7%, higher than the industry’s gain of 12.6%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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