In general, stocks with a low price-to-earnings (P / E) ratio are preferred by investors. The perception is that the lower the P / E ratio, the higher the value of the stock. This implies that the current market price of a stock does not justify its high profits and therefore suggests room for maneuver.
But stocks with increasing P / E ratios can also be worthwhile. We’ll tell you why.
Why is a rising P / E ratio a valuable tool?
Investors should note that the share price moves in parallel with the development of earnings. If profits rise, the price of a share skyrockets. Solid quarterly earnings and forward guidance boost earnings forecasts, leading to stronger demand for the stock and an uptrend in price.
So if the price is steadily rising, it means investors are confident of the stock’s fundamental strength and expecting some strong positive effects. The investor expects the company’s earnings to grow faster in the future due to strong fundamentals.
Studies have also shown that the price / earnings ratios of stocks have risen over 100% from their breakout point in the cycle. So if you can pick stocks early in their breakout cycle, you can end up making significant profits.
The winning strategy
In order to shortlist stocks with increasing P / E ratios, we have chosen the following primary screening parameters.
The EPS growth estimate for the current year is greater than or equal to the actual growth of the previous year
The percentage change in EPS over the last year should be greater than or equal to zero
(These two criteria indicate stagnant earnings or a growth trend over the years.)
Percentage price change over four weeks greater than the percentage price change over 12 weeks
Percentage price change over 12 weeks greater than percentage price change over 24 weeks
(These two criteria show that the price of the stock rises consistently over the periods mentioned.)
Percentage price change for four weeks compared to the S&P 500 greater than the percentage price change for 12 weeks compared to the S&P 500
Percentage price change for 12 weeks compared to the S&P 500 greater than the percentage price change for 24 weeks compared to the S&P 500
(Here the argument for constant price gains becomes even stronger, as it shows percentage price changes compared to the S&P 500.)
The percentage price change for 12 weeks is 20% higher or equal to the percentage price change for 24 weeks, but should not exceed 100%
(A 20% increase in the price of a stock from the breakout point indicates an impending uptrend. However, a jump of more than 100% indicates that there is limited scope for further upward movement and the stock may face a turnaround.)
In addition, we place some other criteria that lead us to some likely outperformers.
Zack’s rank less than or equal to 2: Only companies with a Zacks Rank # 1 (Strong Buy) and a Zacks Rank # 2 (Buy) can get through.
Average 20-day volume greater than or equal to 50,000: A high trading volume requires that the shares have sufficient liquidity.
These few criteria alone narrowed the universe from over 7,700 stocks to just 19.
Here are all five of 19 stocks:
NIKE Inc. (NKE): Zacks Rank # 1 is a company that designs, develops and markets athletic shoes, apparel, equipment and accessories, and services for men, women and children worldwide.
Gibraltar Industries Inc. (ROCK): Gibraltar Industries Inc. manufactures and sells products for the industrial and building market. The product range extends from ventilation and expanded metal to mail storage solutions and products and solutions for rain drainage. It carries the Zacks rank # 2.
Immersion Corporation (IMMR): This Zacks Rank # 2 company develops hardware and software technologies that enable users to interact with computers through their sense of touch.
Semtech Corporation (SMTC):Zacks Rank # 2 company designs, manufactures, and markets a wide range of analog and mixed-signal semiconductors for commercial applications.
Repligen Corporation RGEN: Ranked # 2, Zacks is a leading provider of advanced bioprocess technologies and solutions used by major biopharmaceutical companies and contract manufacturing organizations to manufacture biological drugs such as monoclonal antibodies (mAbs) and gene therapies.
You can get the rest of the stocks on this list by signing up for your 2 week free trial of the Research Wizard now and using this screen in your own trading. In addition, you can also create your own strategies and test them out first before making the investment leap.
The Research Wizard is a great place to start. It’s easy to use. Everything is in simple language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you’re reading an economic report, open the research wizard, plug in your finds, and see what gems come out.
Click here to sign up for a free trial of the Research Assistant today.
Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities and / or hold long and / or short positions in options mentioned in this material. An affiliate investment adviser may own or have sold short sales of securities and / or hold long and / or short positions in options mentioned in this material.
Disclosure: Information on the performance of Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance
Would you like the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click here to get this free report