Buy 5 Stocks With Rising P/E To Break The Myth

The price-to-earnings ratio, or P/E ratio, is probably the most widely used equity valuation metric. It measures the extent to which a stock is undervalued or overvalued by dividing its current market price with its historical or estimated earnings.

Normally, investors’ perception is – the lower the P/E of a stock, the higher is its value. The idea is rooted in a very simple logic that the stock's current market price does not justify its higher earnings and therefore leaves room for upside.

But have you ever thought that stocks with rising P/E can also be rewarding? We’ll tell you why.

Power of Rising P/E

The concept is that as earnings rise, so should the price of the stock. As forecasts for expected earnings come in higher, strong demand for the stock should continue to shoot up its prices. After all, astock's P/E gives an indication of how much investors are ready to shell out per dollar of earnings.

So, if the price is rising steadily, it means that investors are assured of its strong fundamentals 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. All these make the case for a rising P/E a lucrative investing criterion.

The Winning Strategy

In order to shortlist stocks that are exhibiting an increasing P/E, we chose the followingas 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)

Relative price change for 12 weeks is 20% higher than or equal to relative 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 equal to 1: Only companies with a Strong Buy rating can get through.

Average 20-day Volume greater than or equal to 100,000: High trading volume implies that the stocks have adequate liquidity

Just these few criteria narrowed down the universe from over 7,700 stocks to around nine.

Here are five of the nine stocks that made it through the screen:

Belmond Ltd. (NYSE:BEL) : This hotel and travel companyis expected to see an EPS growth rate of 22.22% for this year.

Air Methods Corp. (NASDAQ:AIRM) : This is a provider of air medical emergency transport services. The company’s estimated earnings growth rate for this year is 22.23%.

ReneSola Ltd. (NYSE:SOL) : Headquartered in Jiashan, the People’s Republic of China, thissolar power products company’s estimated earnings growth rate for this year is 320%.

OceanFirst Financial Corp. (NASDAQ:OCFC) : It operates as the bank holding company for OceanFirst Bank that engages into an array of community banking services. It has an expected EPS growth rate of 11.63% for this year.

Manulife Financial Corporation (NYSE:MFC) : It is a provider of financial advice, wealth and asset management solutions. Its estimated earnings growth rate for this year is 7.44%.

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

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