Investors should ideally pick stocks that are ready to make a big move. Consistent earnings growth enthralls almost everyone, right from the top brass to research analysts. 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 an uptick in the stock price.
So, what is earnings acceleration? It is the incremental growth in a company’s earnings per share (EPS). 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 called 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. Meanwhile, 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.
Hence, earnings acceleration should be viewed as a key metric for share price outperformance.
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 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 around 7,735 stocks to only 17. Here are the top five stocks:
AutoZone (NYSE:AZO) retails and distributes automotive replacement parts and accessories. The company has a Zacks Rank #2 (Buy). The company’s projected earnings growth rate for the current quarter and year are 17.7% and 15.7%, respectively.
ESCO Technologies (NYSE:ESE) produces and supplies engineered products and systems for utility, industrial, aerospace, and commercial applications worldwide. The company has a Zacks Rank #2. The company’s projected earnings growth rate for the current quarter is 44.3%.
Tristate Capital Holdings (NASDAQ:TSC) operates as the bank holding company for TriState Capital Bank that provides various commercial and private banking services to middle-market businesses and high-net-worth individuals in the United States. The company has a Zacks Rank #2. The company’s projected earnings growth rate for the current and next quarters are 31.4% and 41.2%, respectively.
Altria Group (NYSE:MO) manufactures and sells cigarettes, smokeless products, and wine in the United States. The company has a Zacks Rank #3 (Hold). The company’s projected earnings growth rate for the current quarter and year are 18.9% and 18.3%, respectively.
Invitation Homes (NYSE:INVH) is a leading owner and operator of single-family homes for lease, offering residents high-quality homes across America. The company has a Zacks Rank #3. The company’s projected earnings growth rate for the current and next quarters are 514.3% and 381.8%, respectively.
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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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