Outstanding earnings growth is the most common characteristic of winning stocks. And companies that achieve growth at increasingly higher rates are even more desirable.
IBD founder William O'Neil wrote that among many factors he studied that set apart winning stocks, earnings growth was the most important. In "How to Make Money in Stocks" he wrote, "none of these characteristics, however, stood out as boldly as the large percentage earnings per share increase each big winner reported in the latest quarter or two before its major price advance."
If a company's profit growth keeps expanding — that is, accelerating — that's even more significant.
Accelerating growth is defined as quarterly earnings growth that occurs at a higher pace than the percentage increase in the prior quarter or two. For example, a company's earnings growth of 15% in one quarter, followed by a 25% increase the next quarter and 35% the next would be an excellent example of an accelerating trend.
It's also considered acceleration when there's a decline in EPS one quarter followed by gains the next two quarters.
O'Neil said almost all big stock winners had accelerating EPS growth sometime in the last 10 quarters before a huge price move began.
Conversely, if earnings growth slows dramatically for two straight quarters, it could signal that the company is heading for trouble.
How To Quickly Find Earnings Growth
The IBD Stock Checkup at Investors.com provides some profit date, including the number of consecutive quarters of accelerating growth. This piece of data, found under the Fundamental Performance section of Checkup, will display "0" if there's been no recent acceleration.
In IBD MarketSmith, the weekly charts display the company's eight most recent quarters of EPS and sales growth. This is another way to detect acceleration.
MarketSmith's screening tools also make it possible for users to create a list of companies with accelerating growth.
Sales Growth Another Key Piece
Accelerating quarterly sales growth is another important factor to a rising stock's price. Investors should look for at least 25% quarterly sales growth, and the higher the better.
An exception to the 25% minimum is if sales growth accelerates over the last three quarters. For example, a sales growth trend of 10%, 15% and 20% would be just as acceptable as a sales jump of 25% in the latest quarter.
Applied Materials was an excellent example in 2020 of how accelerating profit growth reflects a boom in performance.
The chip equipment stock started forming a base during the 2020 bear market (1). Right as the correction started, Applied Materials' EPS rose 21% in the January 2020-ended quarter. The next quarter, EPS rose 27%.
In early July of 2020, the stock broke out of a cup-with-handle base. Several weeks later, the next earnings report saw a 43% increase and the accelerating trend solidified. The stock, however, started a new base.
In early November, Applied Materials broke out again, and this time the stock more than doubled from its 69.90 buy point. A week later, acceleration continued, with a 56% EPS gain for the October 2020 quarter.
Follow Kimberley Koenig for more stock market news on X/Twitter @IBD_KKoenig.
