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How To Invest In Top Stocks: Why Not All Big Market Winners Have The Highest EPS Ratings

When it comes to lasting stock performance among top stocks, growth in earnings per share is the straw that stirs the drink. Few companies make sustained, powerful price moves without powerful increases in the bottom line quarter after quarter, year after year.

It's so important to the CAN SLIM stock selection method that the first two letters — C for current earnings and A for annual earnings — reflect this vital measure.

The CAN SLIM rules are fairly simple: In the most recent quarter, earnings per share should be 25% or higher. A stretch of such gains going back many quarters is best. As for annual EPS, it too should be a minimum of 25% or more going back at least three years. That shows a company's not a flash in the pan, but has real earnings power.

IBD has put all this in one main gauge: its EPS Rating. It tells you how a stock ranks against all others in the IBD database, using the most recent two quarters and the past three to five years.

In general, consider only those companies that rank in the top 10% of all stocks when it comes to the EPS Rating — that is, a 90 or higher. But, surprisingly, some stocks do well even with a sub-90 rating. We've put together a table of such top stocks; they have all performed well enough to make various IBD lists, including Stock Spotlight, Sector Leaders, Stocks Near A Buy Zone, IPO Leaders and IBD 50.

EPS Rating Among Top Stocks: There Are Exceptions

What gives? For some, the EPS Rating might not tell the whole story.

Some companies are new, so they don't have a lengthy track record of earnings. That describes Zscaler(ZS), the global cloud-based computer security company and former Leaderboard member that went public in March last year.

Others are in entirely new industries that have suddenly taken off. That describes ProPetro(PUMP), a Texas based provider of equipment to the booming gas and oil fracking business.

In the same vein with Zscaler, MongoDB (MDB), Mimecast (MIME) and Twilio (TWLO) all excel in the cloud-based computer services and software markets. As new firms, they haven't fully established their long-term earnings clout.

Fed Policy Matters, Too

For still others, notably real estate and finance firms such as NMI (NMIH), a private mortgage insurer, Federal Reserve policy has a huge impact. Lower or stable interest rates stimulate real estate borrowing.

In particular, top real estate investment trusts show signs of life, especially in specialty markets. For example, Innovative Industrial Properties (IIPR) deals in finding and leasing real estate for medical cannabis growers. Rexford (REXR), another property REIT, buys and leases commercial buildings to small businesses in out-of-favor Southern California neighborhoods. And American Tower REIT (AMT) leases cellular towers to the wireless, TV and radio industries.

Then there's Chinese online retailing giant Alibaba (BABA). Recent year-over-year profit increases of 3%, 9% and 9% in the past three quarters have dented its EPS score. Yet it's turning around after several quarters of weak performance related to China's economic slump.

Can great performers be found outside of the 90+ EPS zone? Sure. But because they're not the best, investors still need to be careful. Don't fall in love with a story. Make sure that other fundamentals are sound and the chart action is bullish.