Almost everyone, right from the top brass to research analysts, are captivated by consistent earnings growth. But why is this so? This is because earnings are a measure of the money a company is making. These are essentially revenues that the company makes after subtracting cost of production over a given period of time. Upbeat earnings results mostly lead to an uptick in the share price, but earnings acceleration works even better in boosting the stock price.

Studies have shown that a majority of successful stocks had seen acceleration in earnings before their positive price moves. This is why instead of looking only at the most recent quarter’s earnings growth, one should also focus on earnings acceleration.

Finding Future Outperformers

Basically, earnings acceleration is the incrementally growing earnings per share (EPS) 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 called earnings acceleration.

If you pick stocks just on the basis of earnings growth then you are paying for something that has already been reflected in the stock price. However, earnings acceleration helps you select stocks that haven’t caught the attention of investors yet and consequently are on the verge of solid price appreciation. This is because earnings acceleration considers both direction and magnitude of growth rates.

Increase in the percentage of earnings growth makes us believe that the company is in sound shape and has been on the right track for a consistent period of time. On the other hand, a decelerating percentage of earnings growth may at times drag prices down, while sideways percentage of earnings growth indicates a period of consolidation or slowdown.

Hence, earnings acceleration should be viewed as a key metric for share price outperformance.

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 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 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 around 7,741 stocks to only 22. Here are the top five stocks:

Hill-Rom Holdings, Inc. (HRC - Analyst Report) operates as a medical technology company worldwide. The company operates through three segments: North America, Surgical and Respiratory Care and International. The company’s estimated earnings growth rate for this year is 29.7%.

Cliffs Natural Resources Inc. (CLF - Analyst Report) is a mining and natural resources company that produces and supplies iron ore. The company operates five iron ore mines in Michigan and Minnesota, and the Koolyanobbing iron ore mining complex located in Western Australia. The company’s estimated earnings growth rate for this year is 199.6%.

Acuity Brands, Inc. (AYI - Snapshot Report) designs, produces, and distributes various lighting solutions and services for commercial, institutional, industrial, infrastructure, and residential applications in North America and internationally. The company’s estimated earnings growth rate for this year is 41%.

Live Nation Entertainment, Inc. (LYV - Snapshot Report) operates as a live entertainment company. The company operates through Concerts, Ticketing, Artist Nation, and Sponsorship & Advertising segments. The company’s estimated earnings growth rate for this year is 73.7%.

Icahn Enterprises LP (IEP - Snapshot Report) operates in investment, automotive, energy, metals, railcar, gaming, mining, food packaging, real estate, and home fashion businesses in the United States, Germany, and internationally. The company’s estimated earnings growth rate for this year is 178%.