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Why Look for Bargain Hunting? Bet on 5 Stocks with Rising P/E

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Betting on bargain stocks that have a low price-to-earnings (P/E) ratio is an all-time favorite investing strategy. The perception is that the lower the P/E, the higher is the value of the stock. This is especially true this time around when half of the world is faced with overvaluation concerns in U.S. stocks.

After a stupendous rally by U.S. equities post Trump’s election, it’s not surprising that investors and market watchers will mull over how highly priced the broader market is and look for cheaper stocks. This conclusion is drawn on the simple logic that a stock’s current market price does not justify its higher earnings and therefore leaves room for upside.

But there is more to this whole P/E story. Because not only low P/E, stocks with a rising P/E can also fetch strong returns.

Power of Increasing P/E

The concept is that as earnings rise, so should the price of the stock. As forecasts for expected earnings come in higher, strong demand for the stock should continue to push up its prices. After all, astock's P/E gives an indication of how much investors are ready to shell out per dollar of earnings.

Suppose an investor wants to buy a stock with a P/E ratio of 30, it means that he is willing to shell out $30 for only $1 worth of earnings. Now if the P/E ratio becomes 35 within a short spell of time, it means that the person is now ready to pay $35 for only $1 worth of earnings. It shows that the investor expects earnings of the company to rise at a faster pace in the future owing to strong fundamentals.

So, if the P/E of a stock is rising steadily, it means that investors are assured of its inherent 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 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 37.

Here are five out of the 37 stocks:

Summer Infant Inc. (SUMR - Free Report) : The company is a designer and distributor of juvenile health, safety and wellness products. Its Zacks Industry Rank is in the top 11%, 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.

TerraVia Holdings Inc. : It provides food, nutrition and specialty ingredients. Its Zacks Industry Rank is in the top 11%. The stock has a Zacks Rank #2.

Big 5 Sporting Goods Corporation (BGFV - Free Report) : This Zacks Rank #1 company is a leading sporting goods retailer in the western United States. Its Zacks Industry Rank is in the top 20%.

Schnitzer Steel Industries Inc. (SCHN - Free Report) : It is engaged in operating one of the largest metals recycling businesses in the United States. The stock carries a Zacks Rank #2. The Zacks Industry Rank is in the top 42%.

Research Frontiers Inc (REFR - Free Report) : It is into the development and licensing of suspended particle technology and devices to control the transmission of light. It has a Zacks Rank #2. The Zacks Industry Rank is in the top 39%.

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.

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