Generally, investors are in search of stocks with a low price-to-earnings (P/E) ratio. The idea is that the lower the P/E, the higher will be the value of the stock. It means a stock’s current market price is not priced in yet, and has room left to run owing to its higher earnings potential. This clearly justifies investors’ inclination toward low P/E stocks.
But stocks with a rising P/E are also worth a bet. 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 a rise in 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. Suppose an investor wants to buy a stock with a P/E ratio of 30, it means that he is willing to shell out $30 for only $1 worth of earnings. This is because the investor expects earnings of the company to rise at a faster pace in the future on the back of strong fundamentals.
Also, studies have revealed that stocks have seen their P/E ratios jump more than 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 the previous year
(These two criteria point to a positive or flat earnings growth trend over the years).
Percentage change in price over four weeks greater than 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 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 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 percentage price change for 24 weeks, but it should not exceed 100%
(This criterion indicates that 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 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 Strong Buy or Buy rating 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 102.
Here are five of the 102 that passed the screen.
Carriage Services CSV: This is a leading provider of death care services and products in the United States. It has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Pool Corp. POOL: The Zacks Rank #1 company is the world’s largest wholesale distributor of swimming pool supplies, equipment and related products.
The Buckle BKE: The Zacks Rank #2 company is a leading retailer of medium to better-priced casual apparel, footwear and accessories for fashion-conscious young men and women.
Bolt Biotherapeutics BOLT: This is a clinical-stage immuno-oncology company. It currently has a Zacks Rank #2.
Titan Machinery TITN: The Zacks Rank #2 companyrepresents a diversified mix of agricultural, construction, and consumer products dealerships located in the upper Midwest.
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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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Pool Corporation (POOL) : Free Stock Analysis Report
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