If you’re new to IBD, then you’ll discover that quarterly and annual earnings performance act as powerful drivers of long-term institutional demand.
They get distilled by the first two of seven letters in CAN SLIM, IBD’s principles for sound stock picking. Without the mighty buys by mutual funds, banks, insurers and pension funds, a stock has little hope to become a standout leader.
The rule of thumb from the C and A in the CAN SLIM investing model is to seek 25%-plus increases in earnings and sales in the most recent quarter. But have tiger eyes for an acceleration in growth. If, say, a company posts a 5% year-over-year increase in earnings per share in the first quarter of its fiscal year, then delivers EPS gains of 19%, 39% and 79%, you are witnessing acceleration. Bigger and bigger percentage gains truly get portfolio managers’ blood flowing.
This trend likely points to a number of positive factors, not simply substantial share buybacks by a company that reduces shares outstanding. Accelerating growth may point to corporate investments that are now really bearing fruit. A firm may be grabbing large chunks of market share. Maybe demand for a particular product or service is extending well past national borders. Or, the company has found a great way to operate more efficiently.
The IBD Stock Checkup fundamental performance box shows the number of quarters of EPS growth acceleration. MarketSmith weekly charts allow you to instantly see the progression of growth over at least seven quarters.
Software Firms Often Show EPS Growth Ramp-Up
In 2010, Fortinet (FTNT) turned a profit of 29 cents a share. In 2018, that number hit $1.84 on 171 million shares outstanding. But over that period, quarterly growth showed nice moments of acceleration.
After flat earnings vs. year-ago levels in the second quarter of 2015, the data security giant posted increases of 17%, 29% and 50% in the next three quarters. Then gains got even stronger. From Q4 of 2016 to Q3 of 2017, quarterly profit zoomed 67%, 42%, 93% and 56%. Solid acceleration.
The stock took a long time to recover after getting socked for a 54% drop from a 50.31 peak in mid-August 2015 (1). But in late 2017, a true breakout arrived.
This article was originally published Jan. 12, 2021. Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, sell rules, breakouts, chart analysis and stock market insight.
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