Bet On 4 Top-Ranked Stocks With Rising P/E

Investors often opt for the stock-picking approach that involves stocks with a low price-to-earnings (P/E) ratio. This strategy is based on the notion that the lower the P/E ratio is, the higher the stock value will be. The reasoning behind this is straightforward — when a stock's current market price does not adequately reflect its higher earnings, it suggests growth potential.

But there is more to this whole P/E story. Because not only low P/E, stocks with a rising P/E can also fetch strong returns. In this regard, investors can bet on the likes of NIKE NKE, AGCO AGCO, Docusign DOCU and InterDigital IDCC.

Rising P/E: A Useful Tool

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 push 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.

Suppose an investor wants to buy a stock with a P/E ratio of 30. This means that he is willing to shell out $30 for only $1 worth of earnings as he expects earnings of the company to rise at a faster pace in the future, owing to strong fundamentals.

So, if the P/E of a stock is rising steadily, it means that investors are assured of its inherent 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.

The percentage change in last year’s EPS should be greater than or equal to zero.

(These two criteria point to flat earnings or a growth trend over the years.)

The percentage change in price over four weeks is greater than the percentage change in price over 12 weeks.

The percentage change in price over 12 weeks is greater than the percentage change in price over 24 weeks.

(These two criteria show that the price of the stock is increasing consistently over the said timeframes.)

The 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.

The percentage price change for 12 weeks relative to the S&P 500 is 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.)

The 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 more than 100% indicates that there is limited scope for further upside and that the stock may 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 more than 7,700 stocks to only four.

Here are the four stocks:

Nike: The Zacks Rank #2 company is engaged in the business of designing, developing and marketing of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide. You can see the complete list of today’s Zacks #1 Rank stocks here.

The average four-quarter earnings surprise of NKE is 41.99%.

AGCO: The Zacks Rank #1 company is a leading manufacturer and distributor of agricultural equipment and related replacement parts.

The average four-quarter earnings surprise of AGCO is 316.76%.

Docusign: The Zacks Rank #1 company is a global provider of cloud-based software.

The average four-quarter earnings surprise of DOCU is 6.92%.

InterDigital: The Zacks Rank #1 company is a pioneer in advanced mobile technologies that enable wireless communications and capabilities.

The average four-quarter earnings surprise of IDCC is 54.27%.

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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This article originally published on Zacks Investment Research (zacks.com).

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