Constant earnings growth captivates almost everyone, from the top brass to research analysts. This is because earnings are a measure of the money a company is making.
Still, earnings acceleration works even better when lifting the stock price. Studies have shown that most successful stocks have seen an acceleration in earnings before an uptick in the stock price.
Earnings acceleration is the incremental growth in a company’s earnings per share. In other words, if the rate of a company’s quarter-over-quarter earnings growth increases within a stipulated time frame, it can be called earnings acceleration.
In the 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 yet caught the attention of investors and, once secured, will invariably lead to a rally in the share price. This is because earnings acceleration considers both the direction and magnitude of growth rates.
An increasing percentage of earnings growth means that the company is fundamentally sound and has been on the right track for a considerable period. Meanwhile, a sideways percentage of earnings growth indicates a period of consolidation or slowdown, while a decelerating percentage of earnings growth may drag prices down.
Screening Parameters
Let us look at stocks for which the last two quarter-over-quarter percentage EPS growth rates exceed the previous periods’ growth rates. 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 the universe of around 7,735 stocks to only nine. Here are the three stocks to watch now:
RTX Corporation
RTX Corporation (NYSE:RTX) is an aerospace and defense company. The increase in defense orders and an uptick in air traffic have bolstered RTX’s profit margins.
RTX currently has a Zacks Rank #3 (Hold). RTX’s expected earnings growth rate for the…
Read More: 3 Must-Watch Stocks for Earnings Acceleration
