Page 1069 - How to Make Money in Stocks Trilogy

Buying Checklist 55

Earnings Growth
■ ✔ EPS Rating of 80 or higher

We saw earlier that you need to look at Current quarterly earnings growth
(the “C” in CAN SLIM) and Annual earnings growth (the “A”). The EPS
Rating measures both.
An EPS Rating of 80 tells you the company’s earnings-per-share growth is
in the top 20% of all stocks. You’ll find the biggest winners often have a 95
or higher EPS Rating prior to launching a major move.

■ ✔ EPS growth 25% or more in recent quarters

As a minimum, you want to see earnings-per-share growth of 25% or
higher in recent quarters. But you’ll often find top performers have even
more impressive numbers prior to launching their big moves.
For example, in the two quarters before Google shot up 558% in just over
three years starting in 2004, it posted EPS growth of 155% and 143%. And
in 2006, shoe maker Crocs also showed two quarters of explosive earnings
growth—122% and 330%—before its share price skyrocketed 431% in just
over a year.

■ ✔ Accelerating earnings growth

Ideally, EPS growth should be big and accelerating (i.e., increasing quar-
ter over quarter). That shows the company is continuing to grow its profits.
It’s a warning sign if a stock’s EPS growth rate starts to decelerate and
move in the wrong direction. The stock market is forward looking, and insti-
tutional investors are looking for increasing—not declining—growth.
Case in point: As we saw in the earlier CAN SLIM case study, in the three
quarters before Ulta Beauty surged 165% from September 2010 to July
2011, its EPS growth accelerated from 56% to 62% to 188%.

■ ✔ Average Annual EPS growth of 25% or more over last 3 years

A company can cut costs or take other measures to drive up its earnings
per share for a quarter or two. That can mask more serious underlying prob-
lems the company may be facing in terms of demand for its products,
declining profit margins, or negative industry trends.