How to Screen for Consistent Earnings Growth

Most screens ask a yes-or-no question about the latest report. Revenue up? Earnings up? The latest report is real, and it is also the one most likely to be unusual. A customer pulled an order forward. A comparison quarter was depressed. A gain on a sale landed in operating income. The stock pops, the screen lights up, and next quarter the pattern is gone.

Consistency is the filter that asks whether the pattern has happened more than once.

What “consistent” should mean

You are not looking for a company that has never had a bad quarter. You are looking for a company whose recent history is mostly the behavior you care about. Those are different standards.

A strict streak — revenue up every single quarter for five years — selects a tiny set of businesses and then breaks the moment one of them has an ordinary miss. A looser rule is usually the better screen: the condition was true in at least 3 of the last 4 quarters, or 6 of the last 8. One miss is allowed. A habit of missing is not.

Apply that to a growth rate, not only to the raw dollar figure. “Revenue is higher than it was a year ago” (year-over-year growth above zero) survives seasonality better than “revenue is higher than last quarter.” Retailers, for example, often have a large fourth quarter. Quarter-over-quarter growth will look terrible every spring even when the business is fine. Year-over-year growth compares this spring to last spring.

A screen you can copy

Start with year-over-year revenue growth above 0, required in at least 3 of the last 4 quarters. That single rule removes companies whose growth is a one-quarter event, and it still leaves room for an off quarter.

Then add one quality rule so you are not collecting growth that the company is buying with cash it does not have:

• Positive free cash flow, or
• Positive operating income

You can raise the growth bar — above 10 percent, for example — once you have seen the size of the list. A higher bar is a preference, not a definition of consistency. Consistency is the “several periods” part.

If you want the same idea on the bottom line, repeat it with diluted earnings per share or net income, again on a year-over-year basis. Earnings are lumpier than revenue. Give them the same slack: 3 of the last 4, not 4 of 4, until you know you want the stricter list.

In StockWatch this is the At Least X of the Last Y control on a rule. X is how many periods must pass. Y is how far back you look. The feature guide shows where those fields sit in the builder. You can also describe the rule in a sentence in the screener and then adjust the numbers by hand. Modifiers explains year-over-year growth versus the raw value.

What this will not catch

A consistent screen does not know why the numbers grew. Acquisitions add revenue. Price increases add revenue. A new product adds revenue. The screen treats them the same. That is acceptable at the filtering step and unacceptable at the research step.

When a company passes, open the filing and ask which of those it was. How to read a 10-K after a screen is a short path through the statements and the footnotes that change the story. StockWatch links individual metrics back to the SEC filing they came from, which is the fastest way to start that check. The metrics reference lists the fields.

Also watch the base. Year-over-year growth of 40 percent off a tiny quarter is not the same business as year-over-year growth of 12 percent off a large one. If small starting points keep appearing, add a minimum revenue or market-cap rule instead of raising the growth rate until the list looks serious.

Pair it with a valuation only after the list is real

It is tempting to demand a low price-to-earnings ratio in the same screen. Do that second. A consistency screen that also demands a deep discount often returns companies whose growth is about to stop, because the market has already argued with the trailing numbers.

Run the consistency screen. Sort by the growth rate or by free cash flow yield. Read the names at the top. If you want a harder valuation cutoff, save it as a separate watch so you can see what the extra rule removed. The screening guide covers that “one question per saved screen” habit.

Save the exact rule

The value of a consistency screen is that you can run it again next quarter without rewriting it. Save it and, if you want a nudge when the membership changes, turn on alerts. The alerts guide describes the nightly check.

Then leave the thresholds alone for a full reporting cycle. If the list is full of businesses you would not study, change one number and write down why. A screen you edit every week is a mood, not a process.