Investors are always hunting for stocks with low P/E which indicates undervaluation. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings.
The lower the P/E of a stock, the better for a value investor. This is because value investors believe that a company’s earnings growth potential is not priced in at the current level and thus the stock has higher chances of outperformance, going forward.
Naturally, there are very few investors who pay attention to stocks with an increasing P/E. But this often overlooked trend can prove worthwhile in finding great stocks. 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 earnings forecasts, 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 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. All these make the case for a rising P/E a lucrative investing criterion.
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 Zacks Rank #1 (Strong Buy) or 2 (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 14.
Here are five out of the 14 stocks:
Hasbro Inc. (HAS - Free Report) : This is a games and toys company within the Zacks Industry Rank in the top 7%. The stock has a Zacks Rank #2.
Asbury Automotive Group Inc. (ABG - Free Report) : One of the largest automotive retailers in the U.S., company falls within the Zacks Industry Rank in the top 13%. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Home Depot Inc. (HD - Free Report) : This Zacks Rank #2 company is a home improvement retailer. The Zacks Industry Rank is in the top 40%.
Innoviva Inc. (INVA - Free Report) : The Zacks Rank #2 company is into the biopharmaceuticals industry. The Zacks Industry Rank is in the top 40%.
ZIOPHARM Oncology Inc. (ZIOP - Free Report) : This is a biopharmaceutical company dealing with in-licensed cancer drugs. The Zacks Industry Rank is in the top 40% and 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.
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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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