With key U.S. equity indexes hovering around all-time highs, investors’ search for stocks with a low price-to-earnings (P/E) ratio is understandable.
The idea is that the lower the P/E, the higher will be the value of the stock. The simple logic that a stock’s current market price does not justify (is not equivalent to) its higher earnings and therefore has room to run explains investors’ inclination toward low P/E stocks.
But stocks with a rising P/E can be equally worth buying. We’ll tell you why.
Why Rising P/E a Valuable Tool?
Investors should note that stock price moves in tandem with earnings performance. If earnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and the forward guidance boost earnings forecasts, 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 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 time frames.)
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 factors narrowed down the universe from over 7,700 stocks to 54.
Here are five of 54 stocks that passed the screen:
Alexion Pharmaceuticals Inc. Alexion Pharmaceuticals is a biopharmaceutical company focused on the development and commercialization of life-transforming drugs, for the treatment of patients with ultra-rare disorders. It belongs to a favorable Zacks industry (placed at the top 23% of 250+ industries) and carries a Zacks Rank #2. You can see ALXN: . the complete list of today’s Zacks #1 Rank stocks here OpGen Inc. This Zacks #2 Ranked company is a microbial genetics analysis company. It offers optical mapping services for analysis of microbial, yeast and fungal genomic architecture. It comes from a favorable Zacks industry (top 39%). OPGN: Integer Holdings Corporation (: The company manufactures and develops medical devices and components primarily for original equipment manufacturers (OEMs), which depend on it to design, develop and produce intellectual property protected medical device technologies. The company belongs to a favorable Zacks industry (top 36%) and carries a Zacks Rank #2. ITGR Quick Quote ITGR - Free Report) ReWalk Robotics Ltd This is a developer, manufacturer and marketer of wearable robotic exoskeletons for individuals with spinal cord injury. It comes from a favorable Zacks industry (top 36%) and carries a Zacks Rank #2. RWLK: Civeo Corporation The company is a provider of long-term and temporary remote site accommodations, logistics and facility management services. CVEO:
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. 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