Earnings growth is the trait that separates true market winners from the rest of the pack. In fact, this factor is so vital that it makes up the first two letters of CAN SLIM.
Companies are in business to provide certain goods and services, but their real aim is making money for shareholders.
If a firm isn't delivering on the bottom line and growing its business, there's just no reason for share prices to move up.
After all, the price of a stock is a function of the company's future earnings potential.
With that said, what should you look for in profit growth? And how much growth should you look for ?
First, you want to find companies that grew earnings per share by a minimum of 25% in the latest quarter or past two quarters. Larger percentage increases are even better.
Just make sure you compare the current quarter's results with the same period a year earlier.
The 25% increase is just a floor. Often the best-performing companies will deliver quarterly profit growth well above that.
Research into the most successful stocks from 1952 to 2001 found that they averaged more than a 70% surge in the latest quarter before they began their major advances.
Case in point, fertilizer and animal feed producer Mosaic (NYSE:MOS - News) reported a 1,940% explosion in fiscal third-quarter income back in early April. The stock has gained about 23% since then.
Other companies such as Continental Resources (NYSE:CLR - News), CF Industries Holdings (NYSE:CF - News) and Arch Coal (NYSE:ACI - News) posted triple-digit earnings growth in their latest reported periods.
All of these names have been among the best-performing stocks after breaking out of bases.
Besides the percentage increase, look at the actual earnings figure. If the firm posted a 400% surge in per-share profit by earning a nickel, up from a penny a year ago, you might take that with a grain of salt.
Also, you should deduct one-time items from results to get a good apples-to-apples comparison.
If growth is good, acceleration is even better. That's when the rate of increase improves over consecutive quarters. For example, EPS gains will be 40% one quarter, 45% the next and then 50% in the following period. Accelerating growth tells you there's an important trend under way.
IBD's research found that in most of the the biggest stock market winners, earnings growth accelerated sometime in the 10 quarters before starting their major moves.
On the flip side, watch out for deceleration or slowing growth. Every company can have a bad quarter now and then. But beware if you see two straight quarters of a substantial slowdown. Generally, that means a two-thirds deterioration in EPS growth.
In addition to strong quarterly growth, you want to see evidence that the company has delivered increases on a longer-term basis.
Annual profit growth should be up at least 25% for at least three years in a row.
There are many resources in IBD and Investors.com that can help investors find companies with stellar profit growth.
Stocks In The News, the IBD 100, Your Weekly Review and other features are focused on companies with superior earnings growth.
IBD's EPS Rating calculates long-term and recent quarterly results and ranks those results for every stock on a scale of 1 to 99, with 99 being best.
The earnings-news capsules in IBD give each day's announced results, with key data on companies' earnings trends.
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