Take a company’s revenues over a given period of time, subtract the cost of production and you will have earnings. Earnings growth draws the attention of almost everyone, right from the top brass to research analysts. And why not? If the company doesn’t make money, it won’t survive the test of time.
This metric is also considered a key variable in influencing the share price. Better-than-expected earnings performances normally lead to a rally in the share price. However, in addition to actual earnings, expectations of earnings play a significant role in influencing the price of a stock.
Earnings Estimates Determine Share Prices
We have often seen a decline in the stock price despite earnings growth and a rally in the price following an earnings decline. This is largely a result of a company’s earnings failing to meet market expectations.
Earnings estimates embody analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates serve as a valuable tool while making investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.
Investors, thus, should be on the lookout for stocks that are ready to make a big move. Hence, it is important for investors to buy stocks that have witnessed historical earnings growth and are also seeing a rise in quarterly and annual earnings estimates.
The Winning Strategy
In order to shortlist stocks that have striking earnings growth and positive estimate revisions, we have added the following parameters:
Zacks Rank equal to 1 (Only Zacks' '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.) You can see the complete list of today’s Zacks #1 Rank stocks here.
5-Year Historical EPS Growth (%) greater than X-Industry (Stocks that possess strong EPS growth history.)
% Change EPS F(0)/F(-1) greater than or equal to 5 (Companies that witnessed year-over-year earnings growth rate of 5% or more in the last reported fiscal.)
% Change Q1 Estimates over the last 4 weeks greater than zero (Stocks that have seen their current quarter earnings estimates revised higher in the last 4 weeks.)
% Change F1 Estimates over the last 1 week greater than zero (Stocks that have seen their annual earnings estimates revised higher in the last 1 week.)
% Change F1 Estimates over the last 4 weeks greater than zero (Stocks that have seen their annual earnings estimates revised higher in the last 4 weeks.)
The above criteria narrowed down the universe of around 7,886 stocks to only 15. Here are the top five stocks:
The New York Times Company NYT provides news and information for readers and viewers across various platforms. The company’s estimated earnings growth rate for this year is 13.8%, in contrast to the industry’s estimated negative return of 12.8%.
Huntsman Corporation HUN manufactures and sells differentiated organic chemical products worldwide. The company’s estimated earnings growth rate for this year is 18.2%, higher than the industry’s projected gain of 14.4%.
Graco Inc. GGG manufactures, and markets systems and equipment used to move, measure, control, dispense, and spray fluid and powder materials worldwide. The company’s estimated earnings growth rate for this year is 32.2%, higher than the industry’s expected gain of 23.9%.
Louisiana-Pacific Corporation LPX manufactures building products primarily for use in new home construction, repair and remodeling, and outdoor structures, as well as light industrial and commercial construction applications. The company’s estimated earnings growth rate for this year is 24%, higher than the industry’s projected gain of 19.1%.
Western Digital Corporation WDC develops, manufactures, and sells data storage devices and solutions worldwide. The company’s expected earnings growth rate for this year is 59.3%, higher than the industry’s estimated gain of 35.7%.
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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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Western Digital Corporation (WDC) : Free Stock Analysis Report
Louisiana-Pacific Corporation (LPX) : Free Stock Analysis Report
Huntsman Corporation (HUN) : Free Stock Analysis Report
Graco Inc. (GGG) : Free Stock Analysis Report
The New York Times Company (NYT) : Free Stock Analysis Report
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