While big profit and sales growth is the most important factor in winning stocks, accelerating growth is even better.
It's no surprise that two main elements of successful growth investing are current big earnings and sales growth, in addition to strong annual earnings growth.
As IBD founder William O'Neil wrote in "How to Make Money in Stocks," the key characteristic in a winning stock before it produces a major price gain is a large earnings increase in its latest quarter or two.
To avoid any seasonality factors, always compare the current quarter to the same quarter in the prior year.
O'Neil recommended at least 25% quarterly earnings-per-share growth in the most recent quarter, and the higher the better. Annual earnings growth of at least a 25% in the past three to five years is also desirable.
Sales growth should always accompany profit growth, because sales give a true picture of expansion. Cost cutting and other items can skew profit numbers. Revenue growth ought to be at least 25% in the most recent quarter.
How To Invest: Watch For Accelerating Growth
For both earnings and sales growth, O'Neil's research found that it is especially bullish when there's a trend of accelerating growth. That means the year-over-year growth rate increases from quarter to quarter. For example, a company's quarterly EPS may rise 25%, then 30% the next quarter and 40% the quarter after that.
Even if a company's latest sales growth is below 25%, it still should be considered strong if an acceleration trend has developed. You might see a pace of growth of, say, 8%, 15% and 22%.
A quick glance at the MarketSmith weekly chart shows the seven most recent quarters of EPS and sales percentage moves. This is an excellent source to find acceleration.
The IBD Stock Checkup gives several earnings metrics, including the number of quarters with EPS acceleration. The most recent EPS percent change and average growth over the past three quarters are also shown.
You can also set up a custom screen in MarketSmith to find companies with accelerating growth.
How To Invest: Accelerating Profit Growth In 2 Biotechs
Let's look at Catalyst Pharmaceuticals. The biotech started an accelerating trend in the fourth quarter of 2021. EPS climbed 17%, 30%, 64%, 75%, 86% and 138%. You seldom find such outstanding acceleration. Catalyst's sales growth also accelerated, from 23% to 24%, 43%, 46%, 59% and 59% again in Q4.
The stock traded below 10 a share until last July, and is now trading around 18 a share.
Accelerating growth also counts when the trend starts with a decline. For example, BioMarin Pharmaceutical earnings declined for a few quarters, and were down 5% in the first quarter of 2022. But then EPS climbed 9% in Q2 and 150% in Q3 and 800% in Q4.
This article was originally published April 21, 2023, and has been updated. Follow Kimberley Koenig for more stock news on Twitter @IBD_KKoenig.
