To gauge your chances of picking a winning stock, take a close look at its fundamentals, especially its earnings-per-share growth. IBD's EPS Rating will help.
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You can easily calculate earnings per share. Simply divide a company's net income by its number of shares outstanding. But to find top growth stocks, seek outstanding profit performance.
Specifically, stocks with EPS growth rates of at least 25% compared with year-ago levels suggest a company has products or services in strong demand.
It's even better if the EPS growth rate has been accelerating in recent quarters and years.
"Strong earnings growth is essential to a stock's success and has the greatest impact on its future price performance," IBD founder William J. O'Neil wrote in "How to Make Money in Stocks."
What Is The IBD EPS Rating?
IBD's proprietary Earnings Per Share Rating allows you to quickly identify stocks with the strongest profit growth. The EPS Rating takes into account the growth and stability of a company's earnings over the past three years, with extra weighting put on the most recent two quarters. The result is assigned a rating of 1 to 99, with 99 being best.
An EPS Rating of 99 indicates that a company's profit growth has exceeded 99% of all publicly traded companies in the IBD database. You can find each company's EPS Rating atIBD Stock Checkup, as well as in stock quotes,sector-focused stock research tables and stock charts at Investors.com.
"The EPS Rating is invaluable for separating the true leaders from the poorly managed, deficient and lackluster companies in today's tougher worldwide competition," O'Neil wrote.
Stocks with an 80 or higher rating have the best chance of success. However, companies can boost their EPS figures through stock buybacks that reduce the number of outstanding shares. So, strong profit growth also demands strong sales growth.
Also, stocks with low EPS Ratings can sometimes beat the odds and be successful, often thanks to outstanding sales growth and expectations of future profits.
New issues usually don't have strong EPS Ratings because they don't have much of an earnings history. The same is true with turnaround stocks.
"It's not that companies with poor ratings can't perform. It's just that a greater percentage of them turn out to be disappointments," O'Neil wrote.
Don't Use The EPS Rating In Isolation
For greater certainty about a stock's prospects, it's important to use a company's EPS Rating in conjunction with its Composite Rating, Relative Strength Rating and Accumulation/Distribution score.
Together, these ratings provide a well-rounded picture of a company's fundamentals, including sales growth, institutional investor demand and stock price performance.
As usual, make sure the market is in a confirmed uptrend. Plus, demand the stock toclear a buy point in strong volume before buying it.
This article was originally published June 16, 2020. Follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, breakouts, sell rules and market insight.
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