We humans love rankings. We love the top 500 songs unveiled each Memorial Day and seek out the top five restaurants rated by Bon Appetite magazine. In a world of chaos, we like the fictional supposition that life and all of its messy data can be corralled into neat silos.

But when it comes to earnings reports, we can make meaningful rankings. In fact, I like earnings season for this very reason. It provides me with hard data to support or negate my thesis for buying a stock.

The Growth Stock Strategist Portfolio did quite well in the first quarter, with all but one company earning a better-than-average grade (see table on page 3).

Assigning a hard numerical score to each attribute of a company’s earnings report keeps me honest. Even the most calculating analyst can become emotionally attached to a stock, so grading the results helps keep me disciplined regarding a company’s earnings prospects.

With a hard score, there’s no weaseling, so I’m sharing with you my earnings scorecard.

What’s the Score?

There are three components I’ve scored in each earnings report. The first and most obvious is whether a company beat earnings estimates for the current quarter. The degree to which it beats these estimates is quite important. A lackluster 2% “beat” is not big news, but beating estimates by 20% or more means fundamentals are significantly better than investors expected.

The second component is whether the company beat revenue estimates. Although it isn’t critical for a company to beat these estimates to maintain a solid grade, it is an important metric to watch. Robust revenue growth is the healthiest path to beating earnings estimates. In some perverse situations, usually for companies like Netflix or Amazon, higher revenue growth can often be matched with lower-than-expected earnings due to sky-high marketing costs, but this is not the norm.

When a company misses revenue estimates, I prefer to see any earnings that beat estimates to be driven by lower expenses or higher product margins instead of lower tax rates or one-time asset sales that are unlikely to be repeated.

The third and often most relevant metric is if the company’s future guidance is better or worse than expected.  The stock market is a forward-looking animal, and even fabulous results for the current quarter can be washed out by a negative outlook.  Evaluating this metric is more art than science. Management’s track record for meeting previous guidance, the sustainability of the change and the amount by which the estimates increased all help form the rating.

Raw Numbers

I have formulated a rating system that I will apply to each of Growth Stock Strategist’s stocks every earnings season. I’ll use the same system for the portfolio of Investing Daily’s sister publication Profit Catalyst.

Each stock earns one point for every percentage point that it beats earnings-per-share estimates. A company with an earnings miss is docked by the percentage that the number is missed. Beating revenue estimates earns a company one point, and better-than-expected guidance gets it one or two points. An in-line quarter receives zero points, and missed revenue or mixed guidance each results in a one-point deduction.

The highest possible score is 23, which is earned by beating estimates by 20%, having higher-than-expected revenue, and increasing guidance significantly. One final tweak is awarding a company two points if it beats a number that was raised mid-quarter, which makes it especially difficult to beat estimates at the end of the quarter.

I believe this method will keep our portfolio in crisp shape. There is little wiggle room for flimsy excuses and missed expectations regardless of my affinity for a stock.

Report Card Time

This year’s first-quarter earnings season was fairly tough for the market in general. According to FactSet, despite more than 70% of the companies beating estimates, this same percentage lowered future numbers. Only 50% of companies beat revenue estimates versus a five-year average of 56%. This comes as no surprise for anyone following the plateau on which the economy is bumping along. Robust revenue growth is hard to come by, and the bulk of earnings growth is the result of cost reductions.

The Growth Stock Strategist Portfolio fared well during the first calendar quarter reporting season. Supreme Industries (NYSE: STS) is at the head of the class with an A–. Supreme reported its March quarter before we picked up coverage with a 16% earnings beat and better guidance.

Ethan Allen (NYSE: ETH), Integrated Device Technology (NSDQ: IDTI) and On Assignment (NSDQ: ASGN) all earned a B+. Each one beat earnings and revenue estimates and gave positive guidance. Of these, Integrated received an upgrade from neutral to buy from Merrill Lynch, and On Assignment was awarded a target increase from $40 to $47 by BMO Capital. While we are not wedded to outside analysts’ ratings, these changes do influence stock behavior.

Apogee Enterprises (NSDQ: APOG), Express (NSDQ: EXPR), Exactech  (NSDQ: EXAC) and Weyco Group (NSDQ: WEYS) all scored a B. Apogee and Express, both buy-rated stocks, are doing all the right things, methodically improving their businesses and beating estimates each quarter.  Exactech and Weyco are trading with price-to-earnings ratios well above their expected growth rates and did not display an earnings acceleration that would spur us to increase our rating from its current hold.

Lattice Semiconductor (NSDQ: LSCC), a company I believe is on the cusp of much better earnings, earned only a B– because of its mixed guidance. Lattice has disappointed investors with lackluster numbers in recent quarters, which makes its in-line report more bullish. Nevertheless, rules are rules, and we cannot award Lattice a better rating until it starts beating guidance. We expect a bounce in the second half of the year as more products are launched using Lattice’s technology.

Lastly, Gentex (NSDQ: GNTX) earned a C with its ho-hum quarter. All went according to expectations, but this low-single-digit grower shows no life or reassurance that the stock is worth more than its current valuation.