By Lucas Downey, Contributing Editor, TradeSmith Daily
One of my favorite times of the year is here: earnings season.
This is the eureka moment for firms across the stock market. It provides a litmus test for last quarter's earnings… and more importantly, tells us how business is shaping up moving forward.
Offer a rosy outlook and investors will reward you. Present a downbeat forecast, and your shares can plummet.
While most companies will produce run-of-the-mill results, a chosen few will stun the Street and ignite a monster rally.
There are three simple criteria you need to know to isolate these superstar stocks.
We'll cover those today, along with one company that left Wall Street analysts in awe of its latest results… and is soaring to all-time highs as we speak.
He called the Priceline collapse in 2012, the 2020 crash, and the 2022 bear market. Now he says a new dawn is coming to U.S. stocks. It's time to throw out the investment blueprint of the last decade and prepare for a massive shift. If you've lost money over the past two years, this changes everything.
It's simple. Stocks track underlying businesses. Focus on great businesses and odds are you'll find an outperforming stock.
What's the one thing that great businesses do? They get bigger year after year. That means you need to isolate firms that consistently grow revenues.
And when they grow during rough economic climates like 2023… even better!
One such under-followed firm growing in spades is iconic shoemaker Deckers Outdoor Corp. (DECK). This has been one of my favorite names to follow for years.
Deckers owns a few of the hottest shoe brands around, including HOKA and UGG. If you aren't familiar with the former, chances are you will be in the years ahead.
The HOKA brand is known for ultra-cushioned soles. These are popular with runners and those with an outdoor lifestyle.
The company released red-hot Q2 revenues of $1.09B, easily beating analyst estimates of $960.5MM. Even more, the forward Q3 revenue guidance was raised to ~4.025B, also above estimates.
These beats have been standard practice for DECK, as 20 of the last 21 quarterly reports beat estimates.
Earnings surprises are a great thing to see. And even better is double-digit revenue growth. If you find a company growing revenues at that rate over several years, you'll want to snap it up with both hands.
And naturally, Deckers has a 5-year revenue compound annual growth rate (CAGR) of 13.7%:
That's a beautiful uptrend in a key metric,
But let's keep going… because there's more to a superstar stock than revenue growth.
Step 2 — Follow the Earnings Growth
A growing business is only part of the puzzle. Even more important than revenue growth is earnings growth — the money the company keeps when all is said and done. After all, the reason you buy a company's stock is to participate in its earnings.
Profitability tells an investor a few things:
When profits fall to the bottom line, it can signal management has expenses under control
Growing earnings means the business is healthy. It's the hallmark signal that institutions look for when betting on companies
Ballooning earnings indicates that down the road the stock can pay a dividend, further rewarding shareholders
Earnings are the most important driver of stock returns going back decades. Like revenue growth, you should screen for companies with double-digit earnings growth.
Of course, Deckers is an earnings powerhouse. In 2018, earnings per share (EPS) stood at $3.58/share. Wall Street analysts estimate EPS will reach $23.65/share in 2024.
For those keeping score, that's 560% growth in five years:
Follow the money! Earnings growth is mission critical for outlier winning stocks.
Now let's look at the final criteria for monster stocks…
A "second wave" of A.I. investments is about to pop – with 100X the potential of any gains so far. And if you take the right steps today, you could turn every $100 into $1,000... every $10,000 into $100,000... and beyond.
Great fundamentals like sales and earnings growth attract institutional investors.
Large investors spend countless hours and dollars searching for the best of the best. When they lock-in on a company firing on all cylinders, they pounce in a big way.
My Wall Street career was spent trading with hedge funds and pension funds. I learned to respect order flow.
I also learned that the savviest traders put a ton of focus on the chosen few stocks with incredible products. I'm talking about the Apples and NVIDIAs of the world.
I believe Deckers is cut from the same outlier cloth, dominating their niche: shoes.
Now you can't really know for certain when an institution is leaning into a stock. But you can track unusual volumes and get a pretty good idea.
And when you couple those inflows with outstanding fundamentals like revenue and earnings growth, a beautiful picture emerges.
Below is a chart of DECK since 2018. Notice the ramp in the stock. Also see the blue bars which represent every time the stock logged a rare institutional buy signal:
Repeating blue signals is what you want to see in a stock. That indicates money is flowing into the stock for the right reasons – it's a healthy company that's growing quickly. I like to call this pattern the stairway to heaven!
We've seen Deckers be in the Top 20 big money buy signals 11 times over the past five years, making it one of the highest ranking stocks around. That's exactly the kind of institutional interest we want to see.
It's never logged a bottom 10 signal, which are companies that have shrinking fundamentals and institutional selling.
Also, I've circled something important off to the right. The stock exploded to all-time highs after last week's earnings beat. That tells you Wall Street likes what it sees.
Few stocks are attracting this level of capital. That means you should keep Deckers on your watch list. I believe the stock is going higher in the years ahead.
This is why you want to be selective in your stock choices this earnings season. And as I always say here in TradeSmith Daily, use data to your advantage.
Narrow your investing playbook to these 3 criteria: positive revenue growth, positive earnings growth, and institutional investment.
These three figures are more than enough to sift out the studs from the duds. And you'll be glad you did.
At TradeSmith, we utilize data to bring you the best potential stocks out there.
And my longtime friend and business partner, Jason Bodner, follows the data just as I have today to focus exclusively on stocks just like Deckers.
There Jason uses this winning strategy to target the highest-quality small- and mid-cap stocks with the best chance to keep running higher no matter what the broad stock market does.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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