Erik Hansén walks through a conceptual framework for earnings growth. The earnings clock can be used to find growth stocks early enough, but not stay at the growth party for too long.

We focus on the change in data. Not whether growth is good or bad, but whether it is getting better or worse.

1. Growth is high and so are expectations. The company is starting to show weaker growth, but investors have naively extrapolated historical growth and the “herd” remains very optimistic about future price developments.
2. The company continues to surprise negatively, but the investor community is underreacting to the information.
3. Models of negative surprises catch up with the company and professional short sellers begin to build up positions.
4. Analysts adjust estimates downward after the share price falls and sales and profits decelerate.
5. Investors who previously naively extrapolated the company's growth and underreacted to negative surprises are starting to give up and capitulate.
6. The company is attracting attention from value investors who are looking for disliked and undervalued companies with the potential to start surprising positively.
7. The company surprises positively on low expectations. If it is a turn around case, the company will continue to surprise positively.
8. The company is being captured in positive surprise models, but interest remains low as many investors have previously "burned" in the stock.
9. Price momentum arises in the stock because investors underreact to the positive information.
10. The analyst community begins to adjust their estimates and recommendations upwards after the stock rose and surprised positively.
11. Most investors have noticed that the company has high growth and expectations for the company have also increased.
12. Interest in the stock is at its highest among both investors and analysts. Most analysts have a buy recommendation and growth is peaking.