When an investor is trying to identify a potential winning stock, recent earnings growth matters.
A paragraph from IBD founder and Chairman William J. O'Neil's "" shows why.
"In our models of the 600 best-performing stocks from 1952 to 2001, three out of four showed earnings increases averaging more than 70% in the latest publicly reported quarter before they began their major advances. Those that did not show solid current quarterly earnings increases did so in the very next quarter, with an average earnings increase of 90%!
This is why current earnings growth represents the C in .
A common misconception is that when an investor sees fast recent growth, it is too late to buy. A too-late condition has more to do with late-stage bases than with fast earnings growth.
Let's look at some 2013 winners and their breakouts. What kind of an EPS pop did they show in the most recently reported quarter when they broke out in fast trade
Celgene (CELG) cleared a 81.34 twice. The initial was Dec. 11, 2012, but the stock then retreated 5%. Celgene retook the buy point Jan. 7, 2013. Earnings growth in Q3 was 26% — the seventh consecutive quarter of EPS growth above 25%. From the ideal entry, the stock rose as much as 114% in 2013.
LinkedIn (LNKD) popped above a 117.42 buy point Jan. 10. Earnings growth in Q3, the most recently reported quarter, was 267%. From the ideal entry, the stock rose as much as 119% in 2013.
Lumber Liquidators (LL) broke past a 57.34 Jan. 24. Earnings grew 77% in the quarter reported before the breakout. Lumber rose 109% in 10 months.
FleetCor Technologies (FLT) hurried past a 73 buy point in a three-weeks-tight pattern March 22. Earnings grew 46% in the then-recent quarter. The stock marched 70% in about nine months.
Netflix (NFLX) brushed past a 248.95 entry July 12. At that time, most recent earnings growth was 31 cents a share vs. a loss of 8 cents a share in the year-ago period. The stock advanced 56% in three months.
Others, such as Facebook (FB) and Las Vegas Sands (LVS), had earnings growth of 58% and 48%, respectively, in the then-recent quarter.