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Profit from 5 Top-Ranked Stocks With Rising P/E

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Finding out undervalued stocks or playing safe with value investing may be an intriguing investing idea, but not always.

In this pursuit, we shift a bit from value investors’ favorite and time-tested theme of picking stocks with low P/E. The ratio is deduced by dividing a stock’s current market price with its historical or estimated earnings and measures how much an investor needs to shell out per dollar of earnings.

The lower the P/E of a stock, the higher its value for investors. This is because value investors believe that the stock's current market price is not reflective of its historical/future earnings and therefore chances of outperformance are higher.

But have you thought that stocks with an increasing P/E can be a fascinating idea too? Let’s dig a little deeper.

Rising P/E: An Useful Tool

Investors should note that stock prices move in tandem with earnings performance. If earnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and the forward guidance in turn boost forecasts for the expected earnings, leading to stronger demand for the stock and an uptrend in its price.

So, if the price is rising steadily, it means that investors are assured of the stock’s fundamental strength, expect some strong positives out of it as well as solid and faster earnings growth. Moreover, 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 less than or equal to 2: Only companies with a Strong Buy or 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 18.

Here are five out of the 18 stocks:

Stamps.com Inc. : This is a provider of Internet -based services for mailing or shipping letters or packages with a Zacks Industry Rank in the top 36%. The stock has a Zacks Rank #1 (Strong Buy).

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%. The stock has a Zacks Rank #1.

Silver Spring Networks Inc. : This Zacks Rank #2 (Buy) company operates as a networking platform and solutions provider for smart energy networks. The Zacks Industry Rank of the stock is in the top 5%.

Ingram Micro Inc. : The Zacks Rank #2 company belongs to the information technology sector. The Zacks Industry Rank for the stock is in the top 13%.

Oxford Industries Inc. (OXM - Free Report) : The company is into designing, manufacturing and selling of consumer apparel products. The Zacks Industry Rank of the stock is in the top 31%. The stock has a Zacks Rank #2.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

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: http://www.zacks.com/performance

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