One hallmark of a growth stock is strong quarterly and annual earnings, and that’s something that DR Horton (NYSE: DHI), Boise Cascade (NYSE: BCC) and Quest Diagnostics (NYSE: DGX) have in common.
Although these three stocks hail from diverse industries, all are good examples of run-ups on the heels of solid earnings growth.
While it’s certainly common to see newer stocks race higher without any history of profitability, the stocks that gain a higher share of institutional ownership tend to be those with quarterly or yearly earnings.
Those institutional buyers, such as mutual funds, hedge funds, banks, insurance companies and university endowments, research their purchases carefully and don’t just buy on a “hunch.” Earnings growth is one key fundamental metric they analyze.
For a retail investor looking for a stock with promise, here are some items to watch for:
- Earnings growth of at least 18% vs. the year-earlier quarter
- Annual earnings growth of at least 25% per year
- Revenue up 25% or more recently, or with an accelerating growth rate in recent quarters
- Return on equity of at least 17%
These are characteristics of some of the biggest winning stocks over the past decades.
Don’t worry if a stock meeting these criteria isn’t from a hot sector, or a meme stock, or some big familiar name. Plenty of stocks you’ve never heard of are unsung heroes.
Homebuilder DR Horton grew quarterly earnings at rates of 29% or higher in each of the past five quarters, with growth accelerating in the past two. On a yearly basis, net income grew 31.73%.
Although this can easily be attributed to the home construction boom, the reason for the growth actually doesn’t matter, when you’re looking at the fundamental data.
Revenue growth accelerated in the past three quarters, with a year-over-year increase of 48% most recently, to $5.933 billion. Annual revenue trended higher on a three-year basis. The company has a return on equity of 21%.
DR Horton’s price appreciation reflects institutional confidence in the stock. It’s up 35.43% year-to-date and 143.05% over 12 months. Part of that growth is due to mutual fund ownership, which rose over the past three quarters.
Shares closed Wednesday at $92.83, down $0.31, o 0.33%.
Another company breaking out with the housing boom is Boise Cascade, which manufactures engineered wood products for the construction industry. Earnings grew at double- or triple-digit rates in each of the past five quarters. The three-year earnings growth rate is 28.25%.
Revenue has been growing during that same time frame, with growth of 25% and 34% over the past two quarters. The most recent quarterly revenue was $1.472 billion.
The return on equity is 31%, illustrating efficient use of shareholder investment.
Boise Cascade has also seen a rise in institutional investment in the past three quarters. The stock returned 36.21% year-to-date and 143.32% over the past year. Shares closed Wednesday at $65.92, up $0.91, or 1.40%.
Quest Diagnostics doesn’t have the stellar return of stocks in the homebuilding industry, but it’s been a solid performer over the past year, with a return of 51.21%. It’s up 8.73% so far in 2021.
In the past two quarters, earnings rose 145% and 168%, coming in at $4.48 per share most recently.
The three-year net income growth rate is 22.84%.
Revenue grew 42% and 56%, rising to $3 billion in the quarter ended in December.
Here, too, institutional ownership has been on the rise, contributing to price appreciation.
Return on equity is 25%.
What’s been driving growth?
Quest operates a network of independent diagnostic testing centers throughout the U.S. The company is benefiting from increased diagnostic tests, including those to determine custom therapies, a growing market.
Analysts also believe hospital-based labs will continue outsourcing a growing number of tests, which will also help Quest.
Quest shares closed Wednesday at $127.36, down $1.03, or 0.80%.
D.R. Horton is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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