Constant earnings growth captivates almost everyone, right from the top brass to research analysts. This is because earnings are a measure of the money a company is making. Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings!
Upbeat earnings results are more often than not followed by an uptick in the share price. Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before a rally in the stock price.
Finding Future Outperformers
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.
In case of earnings growth, you pay for something that is already reflected in the stock price. But, earnings acceleration helps spot stocks that haven’t caught the attention of investors yet, which once secured will invariably lead to a rally in the share price. This is because earnings acceleration considers both direction and magnitude of growth rates.
Increasing percentage of earnings growth means that the company is fundamentally sound and has been on the right track for a considerable period of time. On the other hand, a sideways percentage of earnings growth indicates a period of consolidation or slowdown, while a decelerating percentage of earnings growth may at times drag prices down.
This is the reason why earnings acceleration should be viewed as a key metric for share price outperformance.
The Winning Strategy
Let’s look at stocks for which the last two quarter-over-quarter percentage EPS growth rates exceed 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.
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.)
The above criteria narrowed down the universe of around 7,735 stocks to only 19. Here are the top three stocks.
Best Stocks to Buy for Solid Earnings Acceleration: Abaxis Inc (ABAX)
Abaxis Inc (NASDAQ:ABAX) develops, manufactures, markets, and sells portable blood analysis systems for use in human or veterinary patient care settings to provide rapid blood constituent measurements for clinicians worldwide.
The company has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings rose 7.6% over the last 90 days. The stock’s expected growth rate for the next quarter is a solid 28.6%.
Best Stocks to Buy for Solid Earnings Acceleration: Haynes International, Inc. (HAYN)
Haynes International, Inc. (NASDAQ:HAYN) develops, manufactures, markets, and distributes nickel and cobalt-based alloys in sheet, coil, and plate forms in the United States, Europe, Asia, and internationally.
The company has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current year earnings surged 91% over the last 90 days.
The company’s estimated earnings growth rate for the current quarter is 110%, in contrast to the industry’s estimated decline of 74.4%.
Best Stocks to Buy for Solid Earnings Acceleration: Vectrus Inc (VEC)
Vectrus Inc (NYSE:VEC) provides facility and logistics, and information technology and network communication services to the U.S. government worldwide.
The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings jumped 27.2% over the last 90 days.
The company’s estimated earnings growth rate for the current year is 37.8%, higher than the industry’s rally of 9.4%.
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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