Companies that increase their earnings bear a higher potential to drive their share prices far above their intrinsic values than companies with flattening (or even worse, declining) earnings. Past performance cannot be taken as a pledge of future results, but it works as a good predictor of profitable stocks.
Thus, investors may be interested in holdings that have outperformed the S&P 500 Index, the benchmark for U.S. listed stocks, in terms of higher cumulative earnings growth.
The S&P 500 Index’s annual earnings (not adjusted to inflation) averaged 9.4% growth every year in the past five years through March 2019, pushing its share price up 48.5% to around $2,995.99 at close on Tuesday.
Here are some results of my search for companies with market capitalizations above $300 million (which excludes nano and micro-cap stocks) that are expected to perform very well over the next couple of years. In addition to what has already been described, this search considers earnings per share without non-recurring items, as this enables investors to better project future earnings growth.
The first company is Kforce Inc. (KFRC, Financial), which has grown trailing 12-month earnings per share without non-recurring items by 49.8% on average every year over the past five years, as illustrated in the chart below.
The Tampa, Florida-based professional staffing services and solutions provider operates in the U.S. and internationally and closed at $38.5 per share on Tuesday for a market capitalization of $933.82 million.
The stock has climbed 24.5% so far this year, but it underperformed the Nasdaq by 25.5%.
The company has a price-earnings ratio of 7.13 versus the industry median of 17.67 and a price-sales ratio of 0.69 compared to the industry median of 0.67.
The company is currently paying quarterly dividends. The last payment of 18 cents per common share was sent out to Kforce’s shareholders on Sept. 20, producing a 1.87% forward dividend yield versus the S&P 500’s yield of 1.91% as of Oct. 22. The company has paid dividends for 6 years.
Wall Street recommends an overweight rating for shares of Kforce Inc., hinting at a share price that will outperform either the industry or the entire market within 12 months. Analysts have produced estimates on the price target of the stock averaging $35.67 per share.
The Foster City, California-based provider of cloud-based security and compliance solutions operates in the U.S. and internationally and closed at $76.59 per share on Tuesday for a market capitalization of $3.01 billion.
The stock has gained approximately 2.5% so far this year.
The company has a price-earnings ratio of 47.24 versus the industry median of 25 and a price-sales ratio of 10.64 versus the industry median of 2.31.
Qualys Inc does not pay a dividend.
Wall Street issued an overweight recommendation rating for shares of Qualys, Inc. with an average target price of $94.44.
Floor & Decor Holdings, Inc.Â
The third company is Floor & Decor Holdings, Inc. (FND, Financial). The stock has posted 65.1% annual growth for its trailing 12-month earnings per share without non-recurring items over the past five years.
The Smyrna, Georgia-based home improvement stores company closed at $44.8 per share on Tuesday for a market capitalization of $4.46 billion.
The stock has increased 73% so far this year. Its price-earnings ratio is 39.64 versus the industry median of 16.46 and its price-sales ratio of 2.47 is far over the industry median of 0.54.
Floor & Decor Holdings Inc does not pay a dividend.
Wall Street issued an overweight rating for shares of Floor & Decor Holdings, Inc. with an average target price of $47.89.
Disclosure: I have no positions in any securities mentioned in this article.
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