Fast And Stable EPS Growth Can Show Up In Same Stock

Investor's Business Daily

From breakouts in recent months, some stocks have delivered solid to sizzling gains.

Internet giant Google (GOOG) gained as much as 14% past a 738.38 . Biomed stock Celgene (CELG) rose 42% beyond an 81.34 entry. Hertz (HTZ) jumped 43% above a 15.27 buy point before easing. Tupperware (TUP) advanced as much as 27% above its 63.69 entry. CommVault Systems (CVLT) tacked on as much as 24% from a 70.02 buy point in an ascending base. Alaska Air Group (ALK) rumbled 65% past a 38.56 buy point.

What do these stocks have in common

The usual strong fundamentals are there, reflected in high Composite Ratings — an IBD gauge that combines all five IBD ratings into a single number.

However, there is another common element that might surprise you: The companies' earnings histories are remarkably stable.

The EPS Stability Factor's gauge runs from 0 (calm) to 99 (wild). To calculate the factor, a company's quarterly over the past three to five years are recorded. A line is drawn along the earnings numbers, measuring how much the earnings fluctuate from its core trend.

A stability factor of 1 indicates that the majority of earnings fall within a 1% band around the line. In general, a factor below 25 is considered stable.

Among the six stocks listed above, six have a three-year Stability Factor of 1 to 9 and a five-year reading of 2 to 10. Alaska Air is the exception. The three-year is 22 and the five-year is 90.

OK, that 90 isn't so great, but airlines are known for uneven earnings. The 22 over the past three years is quite good for an airline.

Stable earnings give a stock an edge in earnings season. Common sense says stable companies are less likely to miss badly than a company whose earnings are all over the map.

Investors can find the Rating on MarketSmith's weekly charts.

Does this mean all winners have to score well on the Earnings Stability Factor? No. This is one more edge, not a make-or-break element.

For example, LinkedIn (LNKD) popped above a 117.42 buy point on Jan. 10 in heavy and advanced as much as 57%. The stock's three-year Stability Factor is a respectable 33 but the five-year rating is 60.

Cree (CREE) bounced off its 10-week moving average in January and advanced as much as 36% from its close on the gap-up. The LED maker's three-year Stability Factor is 30 and the five-year rating is 47.

Note that the EPS Stability Factor improved in recent years for both of these stocks.

The important thing for investors to keep in mind is that consistency and stability in earnings are found in growth stocks. Stability isn't just about buying utilities.

Rates

View Comments (1)