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Earnings: The Indispensable Element Of Great Stocks

Acceleration Is Also Important

Many stocks that make major advances have another trait. Their earnings accelerate over the previous three or four quarters. Acceleration represents an increase in the earnings growth rate quarter over quarter.

Shares of Cree Inc., the maker of semiconductor devices, were at $20 in May 1999 when it began an ascent that took it past $100 by early 2000. Before this jump began, its quarterly earnings grew 67%, 71% and 86%.

Improving bottom-line growth, such as Cree's, nearly always precedes a burst in stock price. What's important to realize about this is that it's not just rising earnings that make a good stock. The key is to focus on companies whose earnings may be drawing professional investors' attention -- the phase when a stock prepares to spring higher.

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