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Quality Stocks Have A History Of Big Jumps In Annual Profits

A quality stock takes root in a quality background.

The best way to determine a stock's background is to look at annual earnings and other items associated with the A factor in .

In "," IBD founder and Chairman William J. O'Neil offered these suggestions: •"Look for annual that have increased in each of the last three years.

•"The annual rate for earnings growth for the companies you pick should be 25%, 50% or even 100% or more.

•"The consensus among analysts on what earnings will be for the next year should also be up — the more, the better.

•"ROEs of at least 17%. (The really superior growth situations will sport 25% to 50% ROEs.)

•"Cash flow per share that is at least 20% greater than actual earnings per share.

•"Growth stocks with steady earnings tend to have a stability figure below 20 or 25. Companies with stability ratings over 30 are more cyclical and a little less dependable in terms of their growth.

Where can an investor find this data

MarketSmith has all six items listed on its weekly charts. (For investors who prefer seeing the specific EPS numbers, MarketSmith lists the annual EPS numbers for seven years and annual estimates for the next two years.) Stock Checkup at lists four items — "3 Yr EPS Growth Rate," "Consecutive Yrs of Annual EPS Growth," "EPS Est % Chg (Current Year)" and "Annual ROE" — but not cash flow per share or the Factor.

Leaderboard has the Stock Checkup data on its charts.

IBD's newspaper version offers much of the information on the stock charts or accompanying company blurbs. Items offered on the charts include the three-year growth rate and ROE. In the accompanying company listings, the annual EPS estimate percentage change is listed.

If this sounds like too much work, consider making this your first step: Focus on stocks with high EPS Ratings.

As O'Neil notes in "How to Make Money in Stocks": "The measures a company's two most recent quarters of earnings growth against the same quarters the year before and examines its growth rate over the last three years. The results are then compared with those of all other publicly traded companies and rated on a scale from 1 to 99, with 99 being best. An EPS Rating of 99 means a company has outperformed 99% of all other companies in terms of both annual and recent quarterly earnings performance.

"If the stock is newly issued and the company doesn't have a three-year earnings record, look for big earnings increases.. . over the last five or six quarters."