Bargain hunting or looking for stocks with a low price-to-earnings (P/E) ratio is among the widely-used investing strategies. Investors believe that the lower the P/E, the higher will be the value of the stock. The logic is simple — 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 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 20.
Here are five of the 20 stocks:
VALE S.A. (VALE - Free Report) ): It is a mining company. It hails from a top-ranked Zacks Industry (top 1%). The stock currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Second Sight Medical Products Inc. (EYES - Free Report) ): Themedical device company belongs to a top-ranked Zacks industry (top 34%). It carries a Zacks Rank #2.
Carbonite Inc. (CARB - Free Report) ): This Zacks Rank #1 company is a computer service company which provides online backup solutions for consumers and small- and medium-sized businesses to retrieve files if lost on the Internet. It hails from a top-ranked Zacks industry (top 11%).
Arconic Inc. (ARNC - Free Report) ): Arconic was carved out of aluminum giant Alcoa on Nov 1, 2016. The stock carries a Zacks Rank #2. The stock belongs to a top-ranked Zacks industry (top 31%).
vTv Therapeutics Inc. (VTVT - Free Report) ): It is a biopharmaceutical company with a Zacks Rank #2 currently. It belongs to a top-ranked Zacks industry (top 31%).
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.