Right from the top brass to research analysts, earnings growth interests all. This is because earnings are a measure of the money a company is making. Notably, earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time.
Earnings acceleration, however, works even better when it comes to boosting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before a rally in stock price.
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. 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.
This is the reason why 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 16. Here are the top four stocks:
Autodesk, Inc. ADSK operates as a design software and services company worldwide. The company carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for current-year earnings has advanced 3.2% in the past 60 days.
Splunk Inc. SPLK provides software solutions that enable organizations to gain real-time operational intelligence in the United States and internationally. The company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for current-year earnings has moved up 7.3% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CNX Midstream Partners LP CNXM owns, operates, develops, and acquires natural gas gathering and other midstream energy assets in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has moved up 2.9% in the past 90 days.
Entergy Corporation ETR engages in the production and distribution of electricity in the United States. The company sports a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has risen 5.9% in the past 90 days.
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