One of the most common forms of investing techniques is running after stocks with a low price-to-earnings (P/E) ratio. That’s because this basic measure of how much investors are spending for $1 worth of earnings speaks of undervaluation. The logic is simple — a stock’s current market price does not justify its higher earnings and therefore leaves room for upside.
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.
How Does Increasing P/E Theory Work?
The concept is that as earnings rise, the price of the stock goes upward. As forecasts for expected earnings come in higher, strong demand for the stock should continue to push up its prices.
Astock's P/E gives an indication of how much investors are ready to shell out per dollar of earnings. So, if the P/E of a stock is rising steadily, it means that investors are assured of its inherent strength and believe that more positives are to come 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 to 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 six.
Here are all the six stocks:
BJs Wholesale Club Holdings Inc. ( BJ Quick Quote BJ - Free Report) :This Zacks Rank #2 company has emerged as one of the preferred destinations for shoppers when it comes to essentials and other items. You can see . the complete list of today’s Zacks #1 Rank stocks here Bellicum Pharmaceuticals Inc. ( BLCM Quick Quote BLCM - Free Report) : This Zacks Rank #2 company is a clinical stage biopharmaceutical company. Prometic Life Sciences Inc. ( LMNL Quick Quote LMNL - Free Report) : This Zacks Rank #2 biotechnology company engages in discovering, developing and commercializing novel small molecule compounds for respiratory, liver and renal diseases. Vaccinex Inc. ( VCNX Quick Quote VCNX - Free Report) : This Zacks Rank #2 clinical-stage immunotherapy company engages in the discovery and development of biotherapeutics to treat serious diseases and conditions with unmet medical needs, including cancer, neurodegenerative diseases and autoimmune disorders. Meridian Bioscience Inc. ( VIVO Quick Quote VIVO - Free Report) : This Zacks Rank #1 company is a fully integrated life science company that manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and biopharmaceutical enabling technologies that help deliver answers. 360 DigiTech Inc. Sponsored ADR ( QFIN Quick Quote QFIN - Free Report) : This Zacks Rank #2 China-based company provides a data-driven, technology-empowered digital platform. 360 DigiTech Inc. was formerly knonw as 360 Finance Inc.
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