After a lot of hassles related to trade, Wall Street regained its momentum lately. Since we are about to enter the Q1 earnings season, investors probably have shifted their focus to earnings from geopolitics. And investors should note that corporate earnings in the United States have been in decent shape. So, invoke the fighter in you and be a brave investor right now.
While there are a lot of momentum plays around at this moment, investors can try out some rising P/E stocks too. The concept definitely goes against the method of conventional investing where investors always look for stocks with low P/E ratios and try to tap undervalued stocks.
But there is another side to the story that highlights the strength of the stocks with an increasing P/E. This often-overlooked strategy can prove pivotal in finding great stocks. Let’s dig a little deeper.
How Can Rising P/E Be Helpful?
Investors should note that stock prices move in tandem with earnings performance. If earnings come in stronger, the price of a stock soars. Solid quarterly earnings and guidance in turn boost the earnings forecast, 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, expect some strong positives out of it as well as solid and faster earnings growth. Moreover, 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) rating can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 36.
Here are five out of the 36 stocks:
Pilgrim's Pride Corporation (PPC - Free Report) : This chicken company belongs to a top-rankedZacks industry (top 4%). The stock has a Zacks Rank #2.
Insight Enterprises Inc. (NSIT - Free Report) : It is a global direct marketer of brand name computers, hardware and software. The stock belongs to a top-ranked Zacks industry (top 26%) and has a Zacks Rank #2.
Dorman Products Inc. (DORM - Free Report) : This Zacks Rank #2 company is a supplier of OE Dealer Exclusive automotive replacement parts, automotive hardware, brake products, and household hardware to the Automotive Aftermarket and Mass Merchandise markets. The stock comes from a top-ranked Zacks industry (top 26%).
Chemours Company (CC - Free Report) : The Zacks Rank #1 company is into chemical business. The company hails from a top-ranked Zacks industry (top 13%).
Crown Holdings Inc. (CCK - Free Report) : The company is a leading supplier of packaging products to consumer marketing companies around the world. It belongs to a top-ranked Zacks industry (top 49%). 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.
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.
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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: https://www.zacks.com/performance.
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