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Think Out of the Box: Bet on 6 Stocks with Rising P/E
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The price-to-earnings ratio, or P/E ratio, is perhaps the most extensively used equity valuation metric. It measures the extent to which a stock is undervalued or overvalued by dividing its current market price with its historical or estimated earnings.
Now, normally investors’ perception is that the lower the P/E, the higher is the value of the stock. The logic is very simple – its current market price does not justify its higher earnings and therefore leaves room for upside.
But have you ever thought of the fact that stocks with rising P/E can also be rewarding? We’ll tell you why.
Power of Rising P/E
The concept is that as earnings rise, so should the price of the stock. Solid quarterly earnings and the forward guidance boost forecasts for future earnings, leading to stronger demand for the stock and an uptrend in its price. After all, a stock's P/E gives an indication of how much investors are ready to shell out per dollar of earnings.
So, if the price is rising steadily, it means that investors have high hopes on the stock’s fundamental strength on which they expect its earnings to rise at a faster pace.
Also, studies have revealed that stocks have seen their P/E ratios jump over 100% from their breakout point in the cycle. So, if you can pick stocks early in their breakout cycle, you can end up seeing considerable gains.
The Winning Strategy
In order to shortlist stocks that are exhibiting an increasing P/E, we chose the following as our primary screening parameters.
EPS growth estimate for the current year is greater than or equal to last year’s actual growth
Percentage change in last year EPS should be greater than or equal to the previous year
(These two criteria point to flat earnings or a growth trend over the years).
Percentage change in price over four weeks greater than the percentage change in price over 12 weeks
Percentage change in price over 12 weeks greater than percentage change in price over 24 weeks
(These two criteria show that price of the stock is increasing consistently over the said timeframes).
Percentage price change for four weeks relative to the S&P 500 greater than the percentage price change for 12 weeks relative to the S&P 500
Percentage price change for 12 weeks relative to the S&P 500 greater than the percentage price change for 24 weeks relative to the S&P 500
(Here, the case for consistent price gains gets even stronger as it displays percentage price changes relative to the S&P 500).
Percentage price change for 12 weeks is 20% higher than or equal to the percentage price change for 24 weeks, but it should not exceed 100%
(A 20% increase in the price of a stock from the breakout point gives cues of an impending uptrend. But a jump of over 100% indicates that there is limited scope for further upside and that the stock might be due for a reversal).
In addition, we place a few other criteria that lead us to some likely outperformers.
Zacks Rank equal to 1: Only companies with a Strong Buy rating can get through.
Average 20-day Volume greater than or equal to 50,000: High trading volume implies that the stocks have adequate liquidity.
Just these few criteria narrowed down the universe from over 7,700 stocks to just six.
Here are the six stocks:
The Dixie Group Inc. (DXYN - Free Report) : This is a leading carpet and rug manufacturer and supplier to residential and commercial customers. The Zacks Industry Rank of the stock is in the top 8%, at the time of writing.
Stamps.com Inc. : This is a provider of Internet -based services for mailing or shipping letters or packages with the Zacks Industry Rank in the top 22%.
Pacira Pharmaceuticals Inc. (PCRX - Free Report) : It is a specialty pharmaceutical company focused on the development and commercialization of new pharmaceutical products. The Zacks Industry Rank of the stock is in the top 36%.
Humana Inc. (HUM - Free Report) : The company is into health services. The Zacks Industry Rank of the stock is in the top 24%.
Motorcar Parts of America Inc. (MPAA - Free Report) : It is a renowned manufacturer of replacement alternators and starters for imported and domestic cars and light trucks. The Zacks Industry Rank of the stock is in the top 2%.
Aegean Marine Petroleum Network Inc. : It is a marine fuel logistics company. However, its Zacks Industry Rank is not favorable being in the bottom 16%.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Think Out of the Box: Bet on 6 Stocks with Rising P/E
The price-to-earnings ratio, or P/E ratio, is perhaps the most extensively used equity valuation metric. It measures the extent to which a stock is undervalued or overvalued by dividing its current market price with its historical or estimated earnings.
Now, normally investors’ perception is that the lower the P/E, the higher is the value of the stock. The logic is very simple – its current market price does not justify its higher earnings and therefore leaves room for upside.
But have you ever thought of the fact that stocks with rising P/E can also be rewarding? We’ll tell you why.
Power of Rising P/E
The concept is that as earnings rise, so should the price of the stock. Solid quarterly earnings and the forward guidance boost forecasts for future earnings, leading to stronger demand for the stock and an uptrend in its price. After all, a stock's P/E gives an indication of how much investors are ready to shell out per dollar of earnings.
So, if the price is rising steadily, it means that investors have high hopes on the stock’s fundamental strength on which they expect its earnings to rise at a faster pace.
Also, studies have revealed that stocks have seen their P/E ratios jump over 100% from their breakout point in the cycle. So, if you can pick stocks early in their breakout cycle, you can end up seeing considerable gains.
The Winning Strategy
In order to shortlist stocks that are exhibiting an increasing P/E, we chose the following as our primary screening parameters.
EPS growth estimate for the current year is greater than or equal to last year’s actual growth
Percentage change in last year EPS should be greater than or equal to the previous year
(These two criteria point to flat earnings or a growth trend over the years).
Percentage change in price over four weeks greater than the percentage change in price over 12 weeks
Percentage change in price over 12 weeks greater than percentage change in price over 24 weeks
(These two criteria show that price of the stock is increasing consistently over the said timeframes).
Percentage price change for four weeks relative to the S&P 500 greater than the percentage price change for 12 weeks relative to the S&P 500
Percentage price change for 12 weeks relative to the S&P 500 greater than the percentage price change for 24 weeks relative to the S&P 500
(Here, the case for consistent price gains gets even stronger as it displays percentage price changes relative to the S&P 500).
Percentage price change for 12 weeks is 20% higher than or equal to the percentage price change for 24 weeks, but it should not exceed 100%
(A 20% increase in the price of a stock from the breakout point gives cues of an impending uptrend. But a jump of over 100% indicates that there is limited scope for further upside and that the stock might be due for a reversal).
In addition, we place a few other criteria that lead us to some likely outperformers.
Zacks Rank equal to 1: Only companies with a Strong Buy rating can get through.
Average 20-day Volume greater than or equal to 50,000: High trading volume implies that the stocks have adequate liquidity.
Just these few criteria narrowed down the universe from over 7,700 stocks to just six.
Here are the six stocks:
The Dixie Group Inc. (DXYN - Free Report) : This is a leading carpet and rug manufacturer and supplier to residential and commercial customers. The Zacks Industry Rank of the stock is in the top 8%, at the time of writing.
Stamps.com Inc. : This is a provider of Internet -based services for mailing or shipping letters or packages with the Zacks Industry Rank in the top 22%.
Pacira Pharmaceuticals Inc. (PCRX - Free Report) : It is a specialty pharmaceutical company focused on the development and commercialization of new pharmaceutical products. The Zacks Industry Rank of the stock is in the top 36%.
Humana Inc. (HUM - Free Report) : The company is into health services. The Zacks Industry Rank of the stock is in the top 24%.
Motorcar Parts of America Inc. (MPAA - Free Report) : It is a renowned manufacturer of replacement alternators and starters for imported and domestic cars and light trucks. The Zacks Industry Rank of the stock is in the top 2%.
Aegean Marine Petroleum Network Inc. : It is a marine fuel logistics company. However, its Zacks Industry Rank is not favorable being in the bottom 16%.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »