Look For Stability, Not Just Growth, When Researching A Stock's Earnings History
Friday December 21, 6:26 pm ET
Christina Wise

Let's say a company reports year-over-year earnings increases of 120% in the first quarter, 220% in the second quarter and 15% in the third quarter. With that kind of track record, it's tough to know what to expect in the next quarter.

The stock market hates uncertainty.
It tends to punish companies whose progress is haphazard.

IBD's Earnings Stability Rating lets you see at a glance how steady a company's earnings have been. It assigns a rating from 1 to 99 to companies based on the consistency of their earnings, with 1 being the most stable and 99 the least stable.
The market typically looks six months ahead and prices stocks accordingly based on the potential of their sales, earnings and other factors.

It's found in Daily Graphs Online, a product by a sister company of IBD (DailyGraphs.com).

The rating is calculated by recording a company's EPS history during the past three to five years. A line is drawn along the earnings numbers, measuring how much the earnings fluctuate from the core trend.

A rating of 1 tells you the company's earnings are among the top 1% of the market in terms of stability. As a rule of thumb, a stability factor of 35 or lower is desirable.

Why worry about consistency? Well, for one thing, scoring one or two blowout quarters in terms of earnings isn't all that unusual. But a company that consistently logs sizable earnings growth gains quarter after quarter is not likely to be a one-hit wonder.

Consistent earnings also show that a company's products or services have sustainable demand. Some companies' fortunes fluctuate with the economic cycle. Others fall victim to consumers' ever-changing tastes. But a company that has a stable earnings track record is less likely to be subject to such boom-and-bust extremes.

And don't assume that companies with stable earnings all hail from dull industries. As the adjacent table shows, they run the gamut from software companies to drugstore chains.

The table is limited to stocks priced $12 or higher with earnings stability ratings of 25 or less. They're sorted according to their stability factor.

The stocks also have a five-year earnings growth rate of 10% or more and earnings and sales growth gains of at least 20% in the most recent quarter. In addition, they have EPS and Relative Strength Ratings of 80 or higher.