Investor's Corner: Search For Stocks With Fattest Profit Growth

True, the CAN SLIM model tells us to look for a recognizable base pattern, and to gauge volume against price action, and to track how many high-quality funds own the stock.

Watch that 10-week moving average. Are there too many stock splits? What is so special about Baidu's (NasdaqGS: - ) product that would make its stock fly?

But the bottom line is the bottom line.

Here's what you want to see in a company's profit record. Quarterly earnings gains of at least 25% over its year-earlier comparison. The higher the better. You don't want to see any profit shrinkage in recent quarters.

Slightly below-par results may be acceptable if they're moving in the right direction. For instance, a 20% gain in quarterly earnings doesn't look so hot.

But if it comes after a string of results that look like 3%, 8% and 15%, then the company is accelerating its earnings growth. If earnings growth is moving in the right direction, often the stock's price will follow.

Ideally, you want both fat numbers and acceleration. But be warned, that's a tall order.

Now look at annual earnings. The most recent full-year profit also should be at least 25% higher than the previous year. The three-year earnings growth average should come in at no less than 20%.

Which direction are the annual profit growth rates going? Just like the quarterly results, you want to see improvement from year to year. Any significant year-to-year earnings decline would be a big problem for a stock.

Too often, a stock that looks like a leader shows a big flaw in its annual profit growth.

Such a stock still could have great quarterly numbers, but one can easily end up buying a high-profile winner just as it's cooling off. Keep that big picture in mind.

Southern Copper (NYSE: - ), a big-cap copper miner, smelter and refiner, has been soaring for years. After trading down to a split-adjusted 4.22 in November 2001, it hit a peak of 116 last month.

Southern Copper is still putting up solid double-digit earnings growth. With an EPS Rating of 98, only 2% of publicly traded companies are beating Southern's results.

Southern Copper offers other signs that make it look like a leader. Its pretax margin came in last year at a whopping 55.1%.

And that margin has been trending higher for several years, along with the soaring price of copper. As recently as 2003, its pretax margin was 26.2%, and 16.5% the year before that.

But Southern grew its bottom line 345% in 2004, 43% in 2005 and 45% in 2006. Its outlook for this year and next are for gains of 36% and 7%, respectively. That's a serious deceleration.

What's more, analysts have been revising lower their estimates for fiscal '07 and '08 -- after a string of upward revisions the last few months.

This party may be near its end.