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As I pored over research papers on earnings reports, one finding kept repeating itself over and over again: earnings are more relevant when based on an increase in revenue. In the quest to find the best growth stock, sometimes we overlook whether the growth is long-term and high quality or a short-lived anomaly. It makes sense that while share buy-backs and cost-cutting measures can boost EPS, this could hardly be viewed as a sustainable trend – although it might say something about the quality of the management and their responsibility to shareholders.

So to find stocks exhibiting EPS growth on the back of quality earnings, I ran the following scan:

  1. Market Cap of 300 million+ to include small-cap and up
  2. Annualized 5 year revenue growth > 10%
  3. Revenue change year over year > 10%
  4. 5 year earnings growth > 10%
  5. 1 year earnings growth > 13%
  6. EPS growth for the year > 10%
  7. Positive EPS
  8. P/E < 40

The goal is to find stocks growing in both revenue and earnings that are hopefully of a higher quality and more sustainable than high earning stocks without a strong revenue base. The filters were purposely kept low to allow growing stocks the leeway to have a wider range of values across revenue and earnings.

For instance, a stock might have very high revenue growth over a long period of time, but earnings have yet to catch up. Or earnings could be high as net profit margins increase, and revenue – although growing – is lagging.

Note: This scan was not run on micro-caps. If you like micro-cap stocks less than 300 million, you might be interested in these 19 High-Growth Micro-Cap Stocks Under $10.

Stocks Growing in Earnings and Revenue

While not claiming to be the complete and exhaustive list, below are the companies that made the cut:

  • Avnet Inc. (NYSE:AVT)
  • Blue Coat Systems Inc. (NASDAQ:BCSI)
  • G-III Apparel Group, Ltd. (NASDAQ:GIII)
  • Global Payments Inc. (NYSE:GPN)
  • Micron Technology Inc. (NASDAQ:MU)
  • Microsemi Corp. (NASDAQ:MSCC)
  • NetApp Inc. (NASDAQ:NTAP)
  • Oshkosh Truck Corp. (NYSE:OSK)
  • Oyo Geospace Corp (OYOG)
  • TriQuint Semiconductor Inc. (NASDAQ:TQNT)
  • VeriFone Holdings Inc. (NYSE:PAY)
  • Xyratex Ltd (NASDAQ:XRTX)

Some Interesting Details on These Stocks

As I scanned over the financial ratios, some interesting details popped out at me.

  • Some of the stocks had wildly oscillating earnings over the past decade such as MU, MSCC, and OSK.
  • High short ratios (also see 21 High Short-Interest Stocks That Might ‘Cash In’ Soon) over 7% were GIII (17.5%), GPN (8.5%), MU (8.5%), and PAY (10.4%).
  • The growth stocks that analysts gave a moderate buy rating and above to are AVT, GIII, GPN, MU, MSCC, NTAP, OYOG (Strong buy), TQNT, and XRTX. (Also see article Growth Stocks That Analysts Love)
  • The stocks under 2 billion cap are BCSI, GIII, OYOG, and XRTX.
  • Stocks with forward P/E’s less than 15 are AVT, GIII, OSK, and XRTX. Their current P/E’s are also well below 15.
  • Stocks with price-to-sales under 1 are AVT, GIII, MU (borderline), OSK, and XRTX.

As the recession proved, there are no sure bets in stocks even when you pick ones that have high quality earnings grown on the back of increasing revenues. Still, by picking long-term sales and EPS growers, even if running the turtle race, we might be able to lower downside risk of have short-lived high earnings growth reports.

Nonetheless, I must once again put in the big disclaimer of looking over each pick yourself, doing due diligence, and reading the headlines. All too often a stock looks lucrative because of a latent detail the financial scanning tool did not pick up.

Source: 12 Quality Growth Stocks You May Have Overlooked