Search For Stocks With Fattest Profit Growth

Today Investor's Business Daily has a piece on stock selection and importance of earnings and earnings acceleration in stock selection process.

What determines the value of a stock? Earnings, quarterly and annually. Current results and profit expected a year from now. These are the driving forces behind a stock.

True, the CAN SLIM model tells us to look for a recognizable base pattern, and to gauge volume against price action, and to track how many high-quality funds own the stock.

Watch that 10-week moving average. Are there too many stock splits? What is so special about Baidu's (BIDU) product that would make its stock fly?

But the bottom line is the bottom line.

Here's what you want to see in a company's profit record. Quarterly earnings gains of at least 25% over its year-earlier comparison. The higher the better. You don't want to see any profit shrinkage in recent quarters.

Slightly below-par results may be acceptable if they're moving in the right direction. For instance, a 20% gain in quarterly earnings doesn't look so hot.

But if it comes after a string of results that look like 3%, 8% and 15%, then the company is accelerating its earnings growth. If earnings growth is moving in the right direction, often the stock's price will follow.

Ideally, you want both fat numbers and acceleration. But be warned, that's a tall order.

Now look at annual earnings. The most recent full-year profit also should be at least 25% higher than the previous year. The three-year earnings growth average should come in at no less than 20%.

Which direction are the annual profit growth rates going? Just like the quarterly results, you want to see improvement from year to year. Any significant year-to-year earnings decline would be a big problem for a stock.

Too often, a stock that looks like a leader shows a big flaw in its annual profit growth.

Such a stock still could have great quarterly numbers, but one can easily end up buying a high-profile winner just as it's cooling off. Keep that big picture in mind.

Market corrections like the one we are currently witnessing are good time to focus on such stocks. These stocks withstand such corrections. Even if they pullback, they do it reluctantly. Most of the chart patterns which IBD talks about form during such market correction. When the weight of the market correction is lifted from such stocks, they just bolt out.