A stock's earnings are like its engine. If you want to know how far a stock can take you, you've got to pop open the hood and take a look at its earnings per share, or EPS.
EPS is the net income divided by the number of shares outstanding, and is a common way to express profits in the investing world.
You want your stock's EPS up 25% or more compared with the year-ago quarter in the most recent quarter or two. Preferably, EPS should be increasing over recent quarters as well. Ideally, annual EPS also is up 25% or more, or least compares favorably to industry peers.
"Percentage change in EPS is the single most important element in stock selection today. The greater the percentage increase, the better," IBD founder William O'Neil wrote in "How to Make Money in Stocks." Decades of research have supported this notion.
It's so important, in fact, that earnings comprise a key part of The IBD Investing Methodology.
What Is The EPS Rating?
IBD's proprietary Earnings Per Share Rating allows you pick out the stocks with the strongest profit growth at glance.
The EPS Rating is a calculation of a company's growth and earnings stability over the past three years, with extra weight given to the two most recent quarters. The result is assigned a rating of 1 to 99, with 99 being the best.
An EPS Rating of 99 means that your stock's profit growth is better than 99% of all other stocks in IBD's database.
Halliburton did not have an explosive 2021. The stock closed 2021 up only 21% from the year prior. What it did have however, was earnings.
The oil field services provider's bottom line saw multiple quarters of decline in 2020-21 as oil prices slumped. But earnings started turning around in the second quarter of 2021, with a 420% jump. EPS continued rising sharply in 2021. The stock broke out of a cup base in mid-January 2022, just before another strong earnings report. At the time, the EPS Rating was 83, above the 80 minimum desired.
EPS Confirms Leadership
On Jan. 24 before the market opened, the Q4 earnings call reported a 100% increase in earnings per share. While this was not accelerating growth, the three solid quarters of profit growth were a green light. Before the week was over, Halliburton hit the 20% profit-taking zone from its 26.75 cup buy point.
Oil prices had already been rising globally, but the escalation of Russia's war in Ukraine brought further disruptions to the oil and gas supply chain. From $76 per barrel in January 2022, the price of crude oil rose to over $110 per barrel by March 2022.
With support at the 21-day exponential moving average, Halliburton continued to climb for about 12 more weeks before pulling back into another cup pattern on April 19. That was just shy of a 60% profit between the two patterns.
This article was originally published Oct. 24, 2023, and has been updated.
