4 Stocks To Buy With Solid Earnings Acceleration
Zacks Investment Research | Sep 21, 2017 09:42PM ET
Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings! 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.
Better-than-expected earnings results mostly lead to an uptick in the share price. Studies, however, have shown that a majority of successful stocks see acceleration in earnings before a positive stock price movement. Hence, earnings acceleration works even better in driving stock price.
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 take a 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.
Potlatch Corporation (NASDAQ:PCH) is a real estate investment trust (REIT), which is primarily engaged in activities associated with timberland management. The company has a Zacks Rank #1 (Strong Buy). The company’s estimated earnings growth rate for the current and next quarters are 27.2% and 38.1%, respectively.
Cognex Corporation (NASDAQ:CGNX) is a provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. The stock has a Zacks Rank #1. The company’s estimated earnings growth rate for the current quarter is 72.1%. You can see Zacks Investment Research
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