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Rising P/E signals investor confidence in future earnings, not just overvaluation.
Momentum earnings growth combo helps identify early breakout stocks.
Picks: Keurig Dr Pepper, Peloton Interactive, Allbirds & more show upside potential.
Investors often opt for the stock-picking approach that involves stocks with a low price-to-earnings (P/E) ratio. This strategy is based on the notion that the lower the P/E ratio is, the higher the stock value. The reasoning behind this is straightforward — when a stock's current market price does not adequately reflect its higher earnings, it suggests potential for growth.
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. In this regard, investors can bet on the likes of Keurig Dr Pepper (KDP - Free Report) , Purple Innovation (PRPL - Free Report) , H&R Block (HRB - Free Report) , Peloton Interactive (PTON - Free Report) and Allbirds Inc. (BIRD - Free Report) .
Rising P/E: A Useful Tool
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. This means that he is willing to shell out $30 for only $1 worth of earnings as he 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 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 90.
Here are five out of the 90 stocks:
Keurig Dr Pepper: The Zacks Rank #2company is a prominent integrated brand owner, manufacturer and distributor of beverages across the United States, Canada, Mexico and the Caribbean. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average four-quarter earnings surprise of KDP is 3.06%.
Purple Innovation: The Zacks Rank #2 company designs and manufactures products that include mattresses, pillows and cushions, using its patented Hyper-Elastic Polymer.
The average four-quarter earnings surprise of PRPL is 22.72%.
H&R Block: The Zacks Rank #2 company is a leading provider of tax preparation services.
The average four-quarter earnings surprise of HRB is 1.57%.
Peloton Interactive: The Zacks Rank #2 company creates fitness products.
The average four-quarter earnings surprise of PTON is 14.29%.
Allbirds: The Zacks Rank #2 company is a lifestyle brand with naturally derived materials to make footwear and apparel products.
The average four-quarter earnings surprise of BIRD is 15.43%.
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Bet on 5 Top-Ranked Stocks With Rising P/E
Key Takeaways
Investors often opt for the stock-picking approach that involves stocks with a low price-to-earnings (P/E) ratio. This strategy is based on the notion that the lower the P/E ratio is, the higher the stock value. The reasoning behind this is straightforward — when a stock's current market price does not adequately reflect its higher earnings, it suggests potential for growth.
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. In this regard, investors can bet on the likes of Keurig Dr Pepper (KDP - Free Report) , Purple Innovation (PRPL - Free Report) , H&R Block (HRB - Free Report) , Peloton Interactive (PTON - Free Report) and Allbirds Inc. (BIRD - Free Report) .
Rising P/E: A Useful Tool
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. This means that he is willing to shell out $30 for only $1 worth of earnings as he 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 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 90.
Here are five out of the 90 stocks:
Keurig Dr Pepper: The Zacks Rank #2company is a prominent integrated brand owner, manufacturer and distributor of beverages across the United States, Canada, Mexico and the Caribbean. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average four-quarter earnings surprise of KDP is 3.06%.
Purple Innovation: The Zacks Rank #2 company designs and manufactures products that include mattresses, pillows and cushions, using its patented Hyper-Elastic Polymer.
The average four-quarter earnings surprise of PRPL is 22.72%.
H&R Block: The Zacks Rank #2 company is a leading provider of tax preparation services.
The average four-quarter earnings surprise of HRB is 1.57%.
Peloton Interactive: The Zacks Rank #2 company creates fitness products.
The average four-quarter earnings surprise of PTON is 14.29%.
Allbirds: The Zacks Rank #2 company is a lifestyle brand with naturally derived materials to make footwear and apparel products.
The average four-quarter earnings surprise of BIRD is 15.43%.