What drives stock outperformance?

Investors are always looking for stocks that deliver robust gains, trying to squeeze the most out of their buck. Of course, finding big-time winners is much easier said than done, but investors can still deploy a basic framework that puts them on the path to reaping outsized gains.

But what drives market outperformance?

Let’s take a closer look at a few common traits among companies delivering outsized gains.

Robust sales growth is key

Sales growth is vital, as it’s the foundation of generating profits. Strong revenue generation allows companies to achieve scaling efficiencies, generate continuous shareholder value, and many other clear benefits.

A clear-cut example of this has been Nvidia (NVDA - Free Report) over the last year, whose shares have soared on the back of rock-solid sales growth within its Data Center.

Margins are critical

Margin performance reveals how efficiently a company operates, showing whether it’s extracting more profit from each dollar of sales. Expansion indicates that a company is operating more efficiently, with better cost controls and other operational processes driving improved financial health.

Over the last several years, we’ve seen many companies flex their pricing power, namely subscription services such as Netflix (NFLX - Free Report) , without experiencing a notable drop in subscriptions. The result has been a nice boost across their margins, with shares climbing as a result.

Innovation keeps you ahead of the competition

Innovation is crucial for a company to stay relevant, helping it maintain and expand its current market share. Nvidia (NVDA - Free Report) is again a clear-cut example of this favorable development, whose innovation within artificial intelligence (AI) has launched shares and put it at the forefront of market headlines.  

Earnings estimates drive near-term performance

Favorable earnings estimate revisions are key for a stock to move higher, precisely where the Zacks Rank comes into play.

The Zacks Rank uses four factors related to earnings estimates to classify stocks into five groups, ranging from ‘Strong Buy’ to ‘Strong Sell.’ Importantly, it allows individual investors to take advantage of trends in earnings estimate revisions and benefit from the power of institutional investors.

Bottom line

All investors look to reap outsized gains.

When it comes to outperformance, several factors, including robust sales growth, margin expansion, innovation, and favorable earnings estimate revisions, are all contributing factors.

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