Why Investors Should Never Underestimate Earnings Growth

Investor's Business Daily

When IBD founder William O'Neil set out to discover the characteristics of winning stocks, his study came back with a resounding conclusion:Outstanding earnings growth in the most recent quarters is the single most important trait that identifies winners before they start their major price advances.

The study — which analyzed the fundamentals and stock-price behavior of the best stocks during past bull markets — identified other common factors that exist in the formative stage of a future winner.

Ultimately, explosive earnings growth, O'Neil explained, goes hand-in-hand with superior . Generally speaking, the bigger the earnings growth, the better.

Specifically, look for a company's up at least 25% vs. the year-ago level in the most recent quarter or two. Gains of 50%, 100% or more are typical of market leaders — before they make their huge price moves.

That's the essence of the "C" in O'Neil's investing strategy, which stands for current earnings growth.

There's really no mystery about this connection. The most successful companies tend to generate the strongest profit gains, regardless of the economic cycle.

Even during periods when corporate profits are weak, you still find standouts that achieve impressive earnings growth.

Green Mountain Coffee Roasters (GMCR), the name behind the popular single-cup Keurig brewers, posted EPS jumps of 45% and 58% the two latest quarters. Facebook's (FB) earnings soared 58% in Q2 as it leverages its social media service to generate mobile-ad revenue.

Michael Kors (KORS), enjoying solid demand for its chic luxury merchandise, reported a 79% EPS rise in its last quarter.

Several resources in IBD and Investors.com can help investors find companies with top earnings growth.

The best way to get the latest quarterly earnings is to call up a quote on Investors.com. A table displays the company's most recent EPS percentage change plus , three-year earnings growth rate and other financials.

The IBD Stock Checkup , another online tool, also shows the latest quarter's number, with a bonus: the average EPS growth over the past three quarters.

MarketSmith, a sister charting and equity research service, includes the EPS for the four most recent periods.

For a more comprehensive look at earnings performance, you can use the . The proprietary rating compares a company's two most recent quarters and the three-year profit performance against all stocks. It's listed in the Investors.com quotes and various tables in IBD.

The minicharts for IBD 50 in Wednesday's edition are another place to view the most recent EPS and the average percentage gain over the past three quarters.

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