Wall Street is currently on a tumultuous ride thanks mainly to rising rate worries and this is causing corrections in some high-flying names. But this does not mean that investors should be stricken with overvaluation fears, dump stocks that have seen huge price rise lately and run after value picks only.
Though investors generally believe that the lower the P/E, the higher the value of the stock will be, there is more to this whole P/E or valuation story as not only low P/E, stocks with a rising P/E can also fetch solid returns.
Rising P/E: An Useful Tool
Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. After all, astock's P/E gives an indication of how much investors are ready to shell out for every dollar of earnings. Thus, if the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.
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 53.
Here are five of the 53 stocks:
Guess? Inc. (GES - Free Report) ): It is an iconic global lifestyle brand. It hails from a top-ranked Zacks industry (top 9%). The stock carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
GTx Inc. ): It is a biopharmaceutical company. It belongs to a top-ranked Zacks industry (top 32%). The stock carries a Zacks Rank #2.
NCI Building Systems Inc. ): This Zacks Rank #2 company is an integrated manufacturer of metal products for the building industry. It belongs to a top-ranked Zacks industry (top 42%).
EMCOR Group Inc. (EME - Free Report) ): The company is a provider of critical infrastructure systems and gives life to new structures. The stock carries a Zacks Rank #1. The stock belongs to a top-ranked Zacks industry (top 14%).
Mitek Systems Inc. (MITK - Free Report) ): It is involved in the development and sale of software products. It has a Zacks Rank #2 and it belongs to a top-ranked Zacks industry (top 1%).
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: https://www.zacks.com/performance.