Checklist Item #7: Positive Earnings Momentum

As we talked about last week, my market-beating strategy relies on eight must-have factors for any stock. These “fundamentals” are the driving force behind any of my recommendations. Today, let’s talk about another important factor behind my Portfolio Grader rankings: Positive Earnings Momentum.

Let’s look at one of my favorite small-cap stocks as an example: Thoratec (THOR). This innovative manufacturer of heart pumps posted earnings of $6.4 million for the fourth quarter of 2008—almost double the $3.7 million in profits posted in the fourth quarter of 2007! Now that’s a sign of explosive earnings momentum. True, there may be some large-cap stocks out there that report earnings growth of $10 million or more from one quarter to the next—but for a company that rakes in tens of billions in revenue, this isn’t all that impressive. It’s the RATE of growth—not the raw number—that matters.

Remember, it’s not enough for me to see a company's earnings growth—I also want to see its rate of growth increase. You can see for yourself how any stock ranks on the Earnings Momentum factor with my free online stock-rating tool, Portfolio Grader. If a stock has shown that it is making more and more profits every quarter, it’s logical to think more of those profits will come back to shareholders. Stocks like this grade an A or a B in Portfolio Grader. But if a business is seeing earnings shrink or dip into the red, the stock will get a failing grade.

To see how any stock on Wall Street measures up in the category of Positive Earnings Momentum log into my free stock-rating tool, Portfolio Grader now. When you do, be sure to check out the Hot List: Best by Fundamental: I’ll give you the top 3 highest-rated stocks in this category on Wall Street, now.

Let's take a look at a few stocks that rank solid A grades in the fundamental category of Earnings Momentum, and when they report earnings:

• Google (GOOG) – July 16
• MasterCard (MA) – July 30
• Shanda Interactive Entertainment (SNDA) – June 3

Now let's look at those stocks that grade as Fs when it comes to Earnings Momentum:

• TBS International (TBSI) – Aug 5
• MGM Mirage (MGM) – Aug 3
• Gerdau AmeriSteel Corp. (GNA) – Aug 6

To see how any stock on Wall Street measures up in the category of Positive Earnings Momentum log into my free stock-rating tool, Portfolio Grader now. When you do, be sure to check out the Hot List: Best by Fundamental: I’ll give you the top 3 highest-rated stocks in this category on Wall Street, now.

To read more about how to use fundamental factors to pick market-beating stocks, check out my 'Quick-Hit Earnings Trades' series.