Earnings growth interests almost everyone, from the top brass to research analysts. After all, earnings are a measure of the money a company is generating. Notably, earnings are essentially revenues that the company generates after deducting the cost of production over a given period of time.
Nonetheless, earnings acceleration works even better when it comes to boosting the stock price. Studies have shown that a majority of stocks had seen acceleration in earnings before a rally in stock price.
What is Earnings Acceleration?
Primarily, 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.
Therefore, earnings acceleration should be viewed as a key metric for share price outperformance.
4 Solid Choices
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 screen 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 24. Here are the top four stocks:
The Buckle, Inc. BKE operates as a retailer of casual apparel, footwear, and accessories for young men and women in the United States. The company sports a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth rate for the current year is 4.6%.
The TJX Companies, Inc. TJX operates as an off-price apparel and home fashions retailer. The company has a Zacks Rank #2 (Buy). The company’s expected earnings growth rate for the current year is 24.6%.
Digi International Inc. DGII provides IoT connectivity products, services, and solutions in North America, Europe, the Middle East, Africa, and internationally. The company has a Zacks Rank #1. The company’s expected earnings growth rate for the current year is 13.9%.
Pure Storage, Inc. PSTG engages in building a data platform that enables businesses to enhance performance and reduce complexity and costs worldwide. The company has a Zacks Rank #2. The company’s expected earnings growth rate for the current year is 19.1%.