Netflix, Nvidia And 10 More Fast And Steady Earnings Growth Stocks

With few exceptions, you have to pay a steep price to get in on this kind of growth. By way of comparison, the S&P 500 index trades at 26 times its forecast earnings. However, those index earnings (an expected $216 for 2024) incorporate all the negative numbers for money losers. Exclude them and the market’s forward multiple is more like 20.

To make that list of fast growers a company has to enjoy above-average predictability in earnings. Our second table has a higher hurdle for constancy of growth: All these land in the top decile of the universe in predictability of the earnings progression.

Measuring growth is a tricky business. A naïve approach assumes an arithmetic progression, such as $1 a share this year, $1.20 next and then $1.40 and then $1.60. But this is not how the world works. An economic series, whether GDP or the revenue Fair Isaac gets from its credit scores, ought to grow exponentially. A 20% growth rate in earnings per share would mean $1, $1.20, $1.44, $1.73.

But what do you do with a loss year? Tesla went from a loss of 32 cents a share five years ago to a gain of 21 cents the next year. No percentage can be assigned to this improvement.

The analysis behind these growth rate calculations finesses the problem with losses by looking only at positive earnings and only at long-term trends. It starts with 1,860 U.S.-traded companies with market values over $1 billion. The review goes back ten years (to 2013 earnings) and includes a consensus forecast for the current fiscal year (December 31, 2024 in most cases).

Excluded from consideration: Any outfit that doesn’t have at least 10 of the 12 target years in positive territory. That rules out companies that went public after 2015 (like Airbnb and Palantir Technologies) and companies that have too many loss years (like Tesla and Salesforce). All four of these market darlings may prove to be terrific growth companies, but they haven’t proven themselves yet.

The 10 out of 12 minimum eliminates 39% of the stock market. For each of the remaining 1,137 names, the analysis presented here measures the steepness of the exponential curve that best fits a company’s EPS record. The predictability grades are based on the goodness of fit, with penalties for missing years. Those grades are awarded on the curve, with the top quartile scored “Very High” or “High” in predictability and the bottom quartile “Low” or “Very Low.”

Investors yearn for growth rates that are both high and predictable. Indeed, if favorites like Nvidia and Fair Isaac can keep up their pace for a decade or two, their steep multiples would be entirely justified. But no law dictates that growth lasts forever.

Half a century ago, IBM was a favorite. Its earnings growth was good and, possibly with help from well-timed shifts between sales and rentals of its mainframes (remember those things?), impressively smooth. Now IBM stands out on a list of disappointments.