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Ahead of the Profit Curve


By Michael Kaye, CFA Based on a number of encouraging reports in the early part of third-quarter earnings season, it appears that corporate profit growth is finally on the mend (see BW Online, 10/15/03, "A Sector-Level Look at Earnings"). And the stock market has responded to the brightening prospects, with the S&P 500-stock index up 19% year-to-date through Oct. 14.

What about the companies that were ahead of the curve -- those that have displayed accelerating profit growth over the past year? In this week's screen, we wanted to find those outfits that have posted strong earnings growth in recent quarters. Strong momentum in profits may be a signal that these companies are poised to deliver more of the same in the months ahead.

NOT DONE YET. We looked for stocks of companies whose earnings per share had risen over 100% from prior-year levels in each of the last four quarters. (Of course, the growth rates may well have benefited from comparison with depressed year-earlier levels.)

And then we employed one final filter. To uncover issues with the potential for further price appreciation, we sifted for those with S&P's highest investment rankings: 4 STARS (accumulate) or 5 STARS (buy). S&P analysts expect stocks with those rankings to outperform the broader market over the next 6 to 12 months.

When we ran the numbers, these six names emerged:

Ahead of the profit curve

Company/ticker

S&P STARS Rank

Aetna (AET)

4

Benchmark Electronics (BHE)

4

FileNet (FILE)

4

Nextel Communications (NXTL)

5

Steel Dynamics (STLD)

4

Washington Post (WPO)

4

Kaye is a portfolio services analyst for Standard & Poor's


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