Earnings are arguably the most important metric for any company’s top brass. It is commonly referred to as the bottom line that not only serves as the indicator of a company’s profitability but also influences its share price.

The Difference between Good Stocks and Great Stocks

But is there anything more important than earnings growth? The answer is earnings acceleration. This is because earnings acceleration helps you to select stocks that are yet to gain investor attention, which once secured will lead to solid increase in the share price. Earnings acceleration is a company’s increase in quarter-over-quarter earnings growth over a considerable period of time. Now, if you select stocks based only on earnings growth, then you pay for something that has already been reflected in the stock price.

A company is believed to be in a sound financial shape, provided there is an increase in its percentage of earnings growth. Sideways movement in earnings growth, on the other hand, indicates a period of consolidation or even a slowdown. Share prices might tumble if the earnings growth percentage moderates.

So, even as we bank on strong earnings growth in all kinds of markets for share price appreciation, earnings acceleration is mandatory for an additional boost.

The Winning Strategy

Let’s look for stocks for which the last two quarter-over-quarter percentage EPS growth rates are more than the growth rates of the previous periods. The projected quarter-over-quarter percentage EPS growth rate is 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).

We have also added the following criteria:

Current Price greater than or equal to $5: This screens out the 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 over 7,751 stocks to only 9. Here are the top 5 stocks:

Randgold Resources Limited (GOLD - Snapshot Report)

Broadridge Financial Solutions, Inc. (BR - Snapshot Report)

Commerce Bancshares, Inc. (CBSH - Analyst Report)

Hexcel Corp. (HXL - Snapshot Report)

IRSA Inversiones y Representaciones S.A. (IRS - Snapshot Report)