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Betting on bargain stocks that have a low price-to-earnings (P/E) ratio is always a convenient approach. The perception is that the lower the P/E, the higher is the value of the stock. This inference is drawn on the simple logic that a stock’s current market price does not justify (is not equivalent to) its higher earnings and therefore has room to run.
But have you ever given it a thought that stocks with a rising P/E can also be worth buying. We’ll tell you why.
Inside the Strength of Rising P/E
Investors should note that stock price moves in tandem with earnings performance. Ifearnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and the forward guidance boost earnings forecasts, leading to stronger demand for the stock and an uptrend in its price.
In a nutshell, if the price is rising steadily, it means that investors are assured of the stock’s fundamental strength and expect some strong positives out of it. 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 zero
(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 Zacks Rank #1 (Strong Buy) or 2 (Buy) 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 24.
Here are five out of the 24 stocks:
Neos Therapeutics Inc. : The company is into manufacturing and commercializing products for the treatment of attention deficit hyperactivity disorder using drug delivery technologies. Its Zacks Industry Rank is in the top 40%, at the time of writing. The stock carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
FireEye Inc. : The company provides security platform for cyber-attacks to enterprises and governments. Its Zacks Industry Rank is in the top 32%. The stock has a Zacks Rank #2.
Amaya Inc. : This Zacks Rank #2 company offers technology-based products and services in the gaming industry. Its Zacks Industry Rank is in the top 32%.
Range Resources Corporation (RRC - Free Report) : The company acquires, develops and finances oil and gas properties in the U.S. The stock carries a Zacks Rank #1. The Zacks Industry Rank is in the top 19%.
Avinger Inc. (AVGR - Free Report) : It is engaged in manufacturing and selling image-guided, catheter-based systems to treat peripheral arterial disease. It has a Zacks Rank #2 and the Zacks Industry Rank is in the top 38%.
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.
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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5 Stocks with Rising P/E to Enjoy Stellar Gains
Betting on bargain stocks that have a low price-to-earnings (P/E) ratio is always a convenient approach. The perception is that the lower the P/E, the higher is the value of the stock. This inference is drawn on the simple logic that a stock’s current market price does not justify (is not equivalent to) its higher earnings and therefore has room to run.
But have you ever given it a thought that stocks with a rising P/E can also be worth buying. We’ll tell you why.
Inside the Strength of Rising P/E
Investors should note that stock price moves in tandem with earnings performance. Ifearnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and the forward guidance boost earnings forecasts, leading to stronger demand for the stock and an uptrend in its price.
In a nutshell, if the price is rising steadily, it means that investors are assured of the stock’s fundamental strength and expect some strong positives out of it. 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 zero
(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 Zacks Rank #1 (Strong Buy) or 2 (Buy) 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 24.
Here are five out of the 24 stocks:
Neos Therapeutics Inc. : The company is into manufacturing and commercializing products for the treatment of attention deficit hyperactivity disorder using drug delivery technologies. Its Zacks Industry Rank is in the top 40%, at the time of writing. The stock carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
FireEye Inc. : The company provides security platform for cyber-attacks to enterprises and governments. Its Zacks Industry Rank is in the top 32%. The stock has a Zacks Rank #2.
Amaya Inc. : This Zacks Rank #2 company offers technology-based products and services in the gaming industry. Its Zacks Industry Rank is in the top 32%.
Range Resources Corporation (RRC - Free Report) : The company acquires, develops and finances oil and gas properties in the U.S. The stock carries a Zacks Rank #1. The Zacks Industry Rank is in the top 19%.
Avinger Inc. (AVGR - Free Report) : It is engaged in manufacturing and selling image-guided, catheter-based systems to treat peripheral arterial disease. It has a Zacks Rank #2 and the Zacks Industry Rank is in the top 38%.
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: 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 »