Increasing P/E ratios - How Much is Too Much?

Stocks highlighted in this article are: Hansen Natural Corp. (HANS - Snapshot Report), IXYS Corp. (IXYS - Snapshot Report), NutriSystem, Inc. (NTRI - Snapshot Report), SonicWALL, Inc. (SNWL - Snapshot Report) and Sterling Construction Co. (STRL - Snapshot Report).

Since Mar 6, 2009, when the lows were put in on the S&P 500, the market has rallied 28.6% as of the close of trading on Apr 27th.

Its P/E ratio for that same time period (using F1 estimates), is up 25.4%.

How much are F1 estimates up?

Just .098%. (Let's round it up and call it 1%.)

That's a big move without any real upward earnings estimates to speak of.

I know the market was depressed. And P/E ratios plummeted. (In fact, from October 2007 when the market hit its peak to its lows in March '09, its P/E ratio had fallen by nearly 33%.) But now with P/Es on the upswing – is the big jump in multiples at this stage of the game warranted, given where earnings are?

In general, seeing P/Es go up is actually healthy -- assuming earnings expectations follow. Multiples go up as people are willing to pay more for growth, believing that higher growth will cost even more (even higher multiples) down the road.

Again, this all makes sense -- with increasing earnings. Whether those earnings materialize is another thing.

But the jump in P/Es suggests peoples' appetite for risk is increasing and so is their belief that things will be better in the not too distant future.

In this week's screen, I'm searching for stocks with P/E ratios that have increased, but LESS than the market.

In short, if the macro environment is for increasing P/Es, I'm looking for the good growth companies whose multiples have not increased as much – thus giving it more room to grow, which means even higher prices.

My benchmark is the S&P 500 and my time span is the P/E ratio from Mar 6, 2009 to Monday, Apr 27 2009.

The P/E for the S&P 500 in March was 11.16. As of Monday, Apr 27 it was 13.99. That's a 25.4% increase.

So my screen begins with:

• Increase in P/E (from 3/6/09 to 4/27/09)
• Zacks Rank
• Projected Annual Growth Rate > Projected Annual Growth Rate for the S&P 500
  
• Projected Quarterly Growth Rate > Projected Quarterly Growth Rate for the S&P 500
  
• % Change in Q1 Earnings Estimates – 4 weeks > 0
  
• % Change in F1 Earnings Estimates – 4 weeks > 0

Here are 5 stocks from this week's screen:

HANS - Snapshot Report Hansen Natural Corp.
IXYS - Snapshot Report IXYS Corp.
NTRI - Snapshot Report NutriSystem, Inc.
SNWL - Snapshot Report SonicWALL, Inc.
STRL - Snapshot Report Sterling Construction Co.

All of these companies have positive projected growth rates, upward earnings estimate revisions and their P/Es have increased less than the S&P 500.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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