In this post:

• • What is the number 1 driver of a stock that goes on to far outpace the markets?
  • Why strong earnings don’t always mean high stock prices?
  • What two big companies have reported high earnings but ended up trading lower?

Earnings Season Has Begun! Why That’s So Important For Your Investing

If you want to uncover the next big winning stock, now is the ideal time to be screening the markets.

Why? Because the number 1 driver of a stock that goes on to far outpace the markets is big, accelerating earning-per-share (EPS) growth.

This growth in earnings is what attracts the attention of the big institutional investors who go on to bid the stock much higher.

Second quarter earnings reporting just started and according to research firm Factset, the S&P 500 is expected to report the highest earnings growth in more than 10 years.

In addition, during the past four quarters (Q2 2020 through Q1 2021), actual earnings reported by S&P 500 companies have exceeded estimated earnings. (see chart above) On average, 83% of companies reported EPS above their estimates.

This could be great news for investors looking to uncover the next big winner.

Unfortunately, strong earnings alone will not always lead to higher stock prices. You also need investors to feel confident that continued earnings growth will happen for that company going into next year to power the stock higher.

Take JP Morgan (JPM) and Goldman Sachs (GS) who both reported excellent earnings on Tuesday but have since traded lower. This is because they couldn’t guide their earnings estimates higher going into next year.

It’s a different story for clothing manufacturer Levi’s (LEVI) who reported triple digits earnings growth that was 160% above estimates. The stock is up 7% since last Thursday’s report

Historical precedence shows that a minimum quarterly EPS growth rate is 25%. However, the best performing stocks will have EPS gains of 50% to 100% or more, so it’s important to focus on companies with those higher earnings.

Take winning stock West Pharmaceutical (WST) that went on to gain 86% following 2 consecutive quarters of earnings that were above 35% (see chart below).

This stock was a big winner for subscribers to my MEM Edge Report as we identified the stock as a buy 3 weeks prior to their first strong quarter in April of last year.

DAILY CHART OF WEST PHARMACEUTICAL (WST)

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Warmly,
Mary Ellen McGonagle, Senior Managing Director, Stocks