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

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 price. After all, a stock'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 the company's earnings 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.

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's 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 the 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 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 criteria narrowed down the universe from over 7,700 stocks to just 47.

Here are four out of the 47 stocks:

Boot Barn: The Zacks Rank #2 company is the largest lifestyle retailer in the United States, specializing in western and work-related footwear, apparel and accessories. You can see the complete list of today’s Zacks #1 Rank stocks here.

The average four-quarter earnings surprise of BOOT is 11.41%.

The company has a net profit margin (on a trailing 12-month (TTM) basis) of 10.35% versus the industry average of 2.33%. Return on equity (TTM) of the stock is 18.78% versus 12.53% recorded by the underlying industry.

Five Below: The Zacks Rank #2 company is a Pennsylvania-based specialty value retailer offering trend-right merchandise priced mostly at $5 and below, with a select range priced above $5.

The average four-quarter earnings surprise of FIVE is 70.12%.

The company has a net profit margin (on a TTM basis) of 8.67% versus the industry average of 5.79%. Return on equity (TTM) of the stock is 21.31% versus 19.27% recorded by the underlying industry.

The Ensign Group: The Zacks Rank #2 company provides healthcare services in the post-acute care continuum, urgent care center and mobile ancillary segments in the United States.

The average four-quarter earnings surprise of ENSG is 4.29%.

The company has a net profit margin (on a TTM basis) of 6.90%, on par with the industry average. Return on equity (TTM) of the stock is 16.75% versus 13.39% recorded by the underlying industry.

GE HealthCare Technologies Inc.: This is a leading global medtech company. The stock has a Zacks Rank #2.

The average four-quarter earnings surprise of GEHC is 0.94%.

The company has a net profit margin (on a TTM basis) of 9.33% versus the industry average of negative 2.75%. Return on equity (TTM) of the stock is 20.12% versus 2.74% recorded by the underlying industry.

7 Best Stocks for the Next 30 Days

Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."

Since 1988, the full list has beaten the market more than 2X over with an average gain of +23.9% per year. So be sure to give these hand picked 7 your immediate attention. 

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

Zacks Investment Research