Investor's Corner: Use EPS Ratings To Uncover Top Leaders

EPS, or earnings per share, shows a company's net income divided by its number of shares outstanding. The gauge gives a running tally of a single share's claim on the company's bottom line. Remember, you own shares of the company, you don't own the whole company.

IBD's proprietary EPS Rating ranks stocks from 1 (worst) to 99 (best). The rank grades a company's earnings per share growth on both a current-quarter and annual basis compared with all other publicly traded companies.

Investors can use the rating to weed out weak financial performers by narrowing their search to companies with EPS Ratings of, say, 80 or better.

Keep in mind, EPS numbers are not infallible. Companies have some ability to manipulate earnings and EPS figures. Share buybacks, for instance, can drive EPS numbers higher even as profit margins decline.

This is one reason why EPS Ratings are best used in combination with Relative Strength and Composite Ratings and IBD's Stock Checkup data.

Combined, the information can help confirm the fundamental strength or weakness of stocks forming base patterns.

The relatively small Food-Dairy Product industry group shows the value of the EPS Rating gauge.

Made up of only eight companies, the group climbed 62% from May 2006 to June 2007. It has since traded sideways, close to its 10-week moving average line.

Measured by market capital, the group is dominated by Canada's Saputo, Russia's Wimm-Bill-Dann Foods (NYSE: - ) and Dallas-based Dean Foods (NYSE: - ).

Measured by EPS, Saputo and Wimm-Bill-Dann are the top plays, with readings of 92 each. They are also the most solid stock plays. Saputo is up 61% since May 2006. Wimm-Bill-Dann rose 195% before easing off.

Big-cap player Dean, with an EPS Rating of 43, rose 37% between May 2006 and April 2007. But it quickly gave up those gains, and is currently 2% below its highest May 2006 level.

The much smaller American Dairy (NYSEArca: - ) holds the group's third-highest EPS Rating, 71. It gained 28% between May 2006 and January. It then backed off and is 6% below its highest May 2006 mark.

EPS Ratings for the very-small-cap Coolbrands International and Galaxy Nutritional (OTC BB: - ) are 10 and 52, respectively. Both stocks declined more than 30% during the group's ascent.

There are occasional exceptions to the EPS rule. In the dairy group, that exception is Synutra International (NasdaqGM: - ). The infant formula maker's new-issue status gives it some leeway on earnings growth. Shares are up 125% since listing on the Nasdaq in April.