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Beat the Market with Rising P/E Technique

Zacks

Investors are well aware of low P/E investing and its positives. The common investor perception is that the lower the P/E, the higher will be the value of the stock. This inference is drawn on the simple logic that a stock’s current market price does not justify (or is not equivalent to) its higher earnings and therefore has room to run.

Naturally, there are very few investors who pay attention to stocks with an increasing P/E. But this often-overlooked trend can prove useful in finding great stocks. Let’s dig a little deeper.

Why Stocks with Rising P/E Can be Equally Popular

Investors should note that stock prices move in line with earnings performance. If earnings come in stronger, the price of a stock shoots up. Solid quarterly earnings and a forward guidance in turn boost earnings forecasts, leading to stronger demand for the stock and an uptrend in its price.


So, if share 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 just 20.

Here are five of 20 stocks that passed the screen:

Western Digital Corporation WDC: This company provides a portfolio of storage solutions. Its products are marketed under the HGST, SanDisk and WD brands to OEMs, distributors, cloud infrastructure providers and consumers. It belongs to a Zacks Industry Rank in the top 16% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hecla Mining Company HL: This #1 ranked company is a growing gold producer with an operating mine in Quebec, Canada. It belongs to a Zacks Sector Rank in the top 25%.

Sphere 3D Corp. ANY: This is a virtualization technology solution provider. The company belongs to a Zacks Industry Rank in the top 40% and carries a Zacks Rank #1.

Actinium Pharmaceuticals Inc. ATNM: This biopharmaceutical company belongs to a Zacks Industry Rank in the top 42%. It carries a Zacks Rank #2.

Southern National Bancorp of Virginia Inc. SONA: This is a regional bank that belongs to a Zacks Industry Rank in the top 11%. It carries 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.

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.

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