Wall Street is currently on a tumultuous ride thanks mainly to inflation worries and fears arising from the Omicron variant of COVID-19. As a result, stocks with high valuation got a bashing lately. But investors should be stricken with overvaluation fears and dump stocks that have seen huge price rises lately.
Investors generally believe that the lower the P/E, the higher the value of the stock will be. But there is more to this whole P/E or valuation story as not only low P/E, but also stocks with a rising P/E can fetch solid returns.
SunOpta STKL, LaZBoy LZB,Trevi Therapeutics TRVI,Tapestry TPR and Oncolytics Biotech ONCY are some of such stocks.
Rising P/E: An Useful Tool
Generally, the price of a stock rallies on a rise in earnings. As forecasts for expected earnings move higher, demand for the stock should drive its price. After all, astock's P/E gives an indication of how much investors are ready to shell out for every dollar of earnings. Thus, if the P/E of a stock is rising steadily, it means that investors are pinning their hopes on the company’s inherent strength.
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 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 53.
Here are five of the 53 stocks:
SunOpta (STKL): SunOptais an operator of high-growth ethical businesses, focusing on integrated business models in the natural and organic food, supplements and health and beauty markets. The STKL stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
SunOpta has three business units: the SunOpta Food Group, the Opta Minerals Group and the SunOpta BioProcess Group.
LaZBoy (LZB): LaZBoyis one of the world's leading residential furniture producers, marketing furniture for every room of the home. The LZB stock carries a Zacks Rank #2.
The La-Z-Boy Upholstery segment companies are La-Z-Boy and England. The Casegoods segment consists of three brands: American Drew, Hammary and Kincaid. The company-owned Retail segment of the La-Z-Boy Furniture Galleries stores.
Trevi Therapeutics (TRVI): Zacks Rank #2 Trevi Therapeuticsis a clinical-stage biopharmaceutical company.
Trevi Therapeutics is focused on the development and commercialization of nalbuphine ER to treat serious neurologically mediated conditions.
Tapestry (TPR): Tapestry, which was formerly known as Coach, Inc., is the designer and marketer of fine accessories and gifts for women and men in the United States and internationally. The TPR stock carries a Zacks Rank #2.
Tapestry offers lifestyle products, including handbags, women’s and men’s accessories, footwear, jewelry, seasonal apparel collections, sunwear, travel bags, fragrance and watches.
Oncolytics Biotech (ONCY): Oncolytics Biotech, Inc. focuses on the discovery and development of pharmaceutical products for the treatment of a wide variety of human and companion pet cancers. ONCY has a Zacks Rank #2.
Oncolytics Biotech was formed to explore the oncolytic capability of the reovirus, which preferentially replicates in cells with an activated Ras pathway, one of the most common family of genetic defects leading to cancer.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SunOpta, Inc. (STKL) : Free Stock Analysis Report
LaZBoy Incorporated (LZB) : Free Stock Analysis Report
Oncolytics Biotech Inc. (ONCY) : Free Stock Analysis Report
Tapestry, Inc. (TPR) : Free Stock Analysis Report
Trevi Therapeutics, Inc. (TRVI) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research