Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings! Right from the top brass to research analysts, earnings growth captivates all. This is because earnings are a measure of the money a company is making. Upbeat earnings results are more often than not followed by an uptick in the share price.
Earnings acceleration, however, works even better when it comes to lifting the stock price. Studies have shown that a majority of successful stocks had seen acceleration in earnings before an uptick in the stock price.
So, what is earnings acceleration? It is the incremental growth in a company’s earnings per share (EPS). 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 called 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. On the other hand, 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.
Hence, 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 15. Here are the top four stocks that hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Haynes International, Inc. HAYN develops, manufactures, markets, and distributes nickel and cobalt-based alloys in sheet, coil, and plate forms in the United States, Europe, Asia, and internationally. The Zacks Consensus Estimate for its current-year earnings advanced more than 100% over the last 60 days. The company’s estimated earnings growth rate for the current and next quarters are 110% and 243.8%, respectively.
Ichor Holdings, Ltd. ICHR engages in the design, engineering, and manufacture of fluid delivery subsystems for semiconductor capital equipment in the United States, the United Kingdom, Singapore, and Malaysia. The Zacks Consensus Estimate for its current-year earnings increased 3.5% over the last 60 days. The company’s estimated earnings growth rate for the current and next quarters are 64.9% and 61.7%, respectively.
Regional Management Corp. RM, a diversified consumer finance company, provides various loan products primarily to customers with limited access to consumer credit from banks, thrifts, credit card companies, and other traditional lenders. The Zacks Consensus Estimate for its current-year earnings increased 16.6% over the last 60 days. The company’s estimated earnings growth rate for the current and next quarters are 6.2% and 27.3%, respectively.
SLM Corporation SLM operates as a saving, planning, and paying for college company in the United States. The Zacks Consensus Estimate for its current-year earnings increased 15.1% over the last 60 days. The company’s estimated earnings growth rate for the current and next quarters are 14.3% and 50%, respectively.
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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.
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Ichor Holdings, Ltd. (ICHR): Free Stock Analysis Report
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