Constant earnings growth captivates almost everyone, right from the top brass to research analysts. This is because earnings are a measure of the money a company is making. Take a company’s revenues over a given period of time, subtract the cost of production and you will have its earnings!

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.

Finding Future Outperformers

Basically, 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. 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.

This is the reason why earnings acceleration should be viewed as a key metric for share price outperformance.

The Winning Strategy

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.