EPS100Momentum (71.69)

What do these 5 stocks have in common? "Accelerating growth"

March 22, 2010 – Comments (0)

Mar 22, 2010 11:13 PM | about stocks: WAG, F, FINL, ALV,

M, RIMM, AAPL, GOOG, BIDU, IBM, HPQ, CSCO, INTC, AMD

1. Walgreen's (WAG) past 5yrs growth was 7.1%, next 5 yrs est. is for double that with 14.3%

2. Ford's (F) past 5yrs growth was 4.7%, next 5yrs est. is for triple that with 15%

3. Finish Line (FINL) past 5yrs growth was 3.2%, next 5yrs est. is for triple that with 9%

4. Autoliv (ALV) past 5yrs growth was actually negative -18.37%, next 5yrs est. is for 19.2% or

"Sudden acceleration" has become a buzzword for all the wrong reasons in the car industry this year.

But in the world of investing, it's still something that you want to see.

One hallmark of winning stocks is a sudden acceleration in earnings and sales growth, says William J. O'Neil, IBD's founder and chairman, in his best-seller "How to Make Money in Stocks."

"If a company's earnings have been up 15% a year and suddenly begin spurting 40% to 50% or more," O'Neil says, "this usually creates the conditions for important stock price improvement."

While it's clear what acceleration means for a car, it can be a confusing concept when it comes to a company's profit and revenue. So here's a simple example.

Let's say a company reported that per-share earnings climbed 30% in the second quarter, compared with the year-ago period. Then its EPS rose 60% in the third quarter. Lastly, fourth-quarter EPS jumped 100%.

This is exactly what's meant by accelerating EPS growth. The rate of growth vs. the year-ago result has risen from quarter to quarter. (Keep in mind that you should compare the latest EPS to the result in the year-ago quarter, not the prior period, so that you're comparing apples to apples.)

This firm has not just posted profit gains beyond the 25% level often found in market leaders before their big run-ups, but these gains have accelerated. They've ramped up from 30% to 60% and 100%.

Studies of the market's big winners found that most experienced profit acceleration sometime in the 10 quarters before they began their major advances.

As you look for accelerating EPS growth, keep an eye on sales as well. Companies with falling revenue often grow earnings for a few quarters by cutting costs, especially in a recession. But it's not a sustainable approach.

O'Neil says strong and improving quarterly earnings should always be supported by sales growth of at least 25% in the latest period.

Accelerating sales can make up for cases when the period's gain wasn't quite 25%. Also, a ramp-up in sales growth is in itself a desirable trait.

What's more, whether it's acceleration in EPS or revenue, an accelerating trend remains a positive for a stock even after the trend has run its course.

When something has really put the brakes on EPS growth, be sure to pay attention.

Two sharply slower quarters in a row are a red flag, O'Neil says in his book.

He says a worrisome drop is one that's "two-thirds or greater from the previous rate — a slowdown from 100% earnings growth to 30%, for example, or from 50% to 15%."

The earnings growth posted in 2006 and 2007 by Research In Motion (NMS:RIMM) helped signal that it could be setting up to make a big advance.

In September 2006, RIM reported EPS growth of 25% for the second quarter of its 2006 fiscal year. 1

That was an acceleration from the 22% EPS gain in the prior quarter. This result also was supported by a 34% increase in sales.

The BlackBerry maker then posted 35% EPS growth for that fiscal year's Q3 in December 2006. 2 Sales were up 49%.

And in April 2007, RIM said Q4 earnings increased 57%, fueled by a 66% rise in revenue. 3

About a month after its Q4 report, the stock broke out and staged a huge run-up. 4 That shouldn't have been that much of a surprise given its accelerating EPS growth.