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Wall Street is addicted to growth, and nothing grabs traders' attention better than a steady acceleration in revenue or earnings growth. What do we mean by that? Accelerating growth is nothing more than a growth rate that increases steadily over time. For example, a company might show earnings growth of +10% in the first quarter followed by growth of +15% in the second quarter and +20% in the third. In other words, earnings are increasing at an increasing rate. For a real world example, consider the case of Cisco Systems (Nasdaq: CSCO) in the late 1990's. While the company posted solid growth rates in the mid-1990's, things began to cool off in 1997. That year, general cyclicality caused a slowdown in the tech market, and Cisco was still feeling the aftermath of the Asian contagion. However, by 1998 signs of improvement were on the horizon. In the first quarter that year, Cisco reported year-over-year quarterly revenue growth of +26.6%. And by the end of 1998, growth had steadily picked up to nearly +39%. The reason for the pickup: corporations were spending billions to upgrade their networks to handle an explosion in online and electronic data. Cisco's networking gear literally made the Internet and corporate networks possible, and the firm was among the primary beneficiaries of the explosion in online traffic and corporate spending on information technology. If you'd simply purchased Cisco stock after the company's fourth consecutive quarter of accelerating growth, then you would have been sitting on gains of more than +130% just one year later. Of course, you might say, even a drugged monkey could have picked winning stocks at the tail-end of the tech boom of the late 1990's. However, Cisco is not an isolated example of how accelerating growth can tip big winners. Consider the case of Research in Motion (Nasdaq: RIMM), the firm behind today's popular BlackBerry smart phones and mobile devices. At the beginning of this decade, BlackBerry was not the household name it is today. Most consumers simply weren't interested in smart phones that allowed access to e-mail and Internet content on the go. In fact, for many, the mobile phone itself was still a relative novelty. Those who found the need for a handheld device probably owned a Palm -- Palm was the most popular handheld device by far in 2000. However, the growing popularity of the BlackBerry brand began showing up the form of enormous revenue gains at Research in Motion in 2001 and 2002. Despite the tech bust of 2000 and a recession in 2001, the company's quarterly revenue growth picked up from +57% in its February 2000 quarter to more than +250% by its February 2001 quarterly report. If you'd bought the stock at the end of February 2001, you'd now be sitting on total gains of better than +900%.  As
the chart to the right shows, a $10,000 investment made in RIMM in February
2001 would now be worth roughly $100,000.Aside from company-specific improvements, accelerating earnings or revenue growth can also signal cyclical shifts in certain market groups. A classic example is the cyclical energy sector and, in particular, companies that explore for and produce natural gas or crude oil. In 2001, natural gas prices collapsed and many gas-focused producers were hit hard. Take explorer XTO Energy (NYSE: XTO) as an example. Company sales declined in late 2001 and through the first two quarters of 2002. But that all started to change late in 2002 and into 2003. In fact, the firm's revenue growth accelerated from +2% in its September 2002 quarter to more than +40% by March of 2003. Those who bought XTO in late March of 2003, after the company's fourth consecutive quarter of accelerating growth, are currently sitting on gains of more than +460%. In fact, XTO has been one of the best-performing stocks in the S&P 500 throughout this decade. The same basic trend of accelerating quarterly revenue growth was evident in many natural gas firms during that period. That pattern was an excellent sign that a cyclical turn in the group was well underway. With these points in mind, my staff and I recently scoured the market for firms with accelerating quarterly earnings or revenue growth. In the process, we focused on firms that met the following criteria:  Three-year annualized revenue growth of +20% or higher Accelerating revenue OR earnings growth in each of the past four quarters Revenue growth in the most recent fiscal year greater than the prior
fiscal year Positive operating margins Market capitalization of greater than $150 millionAfter running these criteria through StreetAuthority's advanced screening software, we came up with the following list of companies... Important Note: Throughout the remainder of this article, Editor Paul Tracy and our research staff provide the names of nine companies that meet the requirements above. However, in order to view the remainder of this article, you'll need to subscribe to our premium newsletter -- Market Advisor. After you subscribe you'll receive immediate access to this full article, as well as our monthly Market Advisor newsletter and a host of additional premium content. Please visit one of the following links to continue... Good investing!
Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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