Why You Should Bet on 5 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. The reasoning behind this is straightforward — when a stock's current market price does not adequately reflect its higher earnings, it suggests potential for growth.

But there is more to this whole P/E story. Because not only low P/E but also stocks with a rising P/E can also fetch strong returns. In this regard, investors can bet on the likes of CLEAR Secure YOU, Applied DNA Sciences APDN, Phreesia PHR, Vigil Neuroscience VIGL and Biodesix BDSX.

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

Percentage change in last year EPS should be greater than or equal 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 57.

Here are five out of the 57 stocks:

CLEAR Secure: The Zacks Rank #1  company platform connects you to the cards in your wallet.

The year-over-year earnings growth estimate of YOU for the upcoming quarter is 77.61%.

Applied DNA Sciences: The Zacks Rank #2 company provides proprietary DNA-embedded biotechnology security solutions using non-human DNA that verify authenticity and protect corporate and government agencies from counterfeiting, fraud, piracy, product diversion, identity theft and unauthorized intrusion.

The year-over-year earnings growth estimate of APDN for the upcoming quarter is 14.81%.

Phreesia: The Zacks Rank #2 company provides a patient intake management platform. The company's SaaS platform engages patients in their care and provides a modern, consistent experience while enabling healthcare organizations to optimize their staffing, boost profitability and enhance clinical care.

The year-over-year earnings growth estimate of PHR for the upcoming quarter is 15.99%.

Vigil Neuroscience:This Zacks Rank #2 company is a microglia-focused therapeutics company.

The year-over-year earnings growth estimate of VIGL for the upcoming quarter is 6.84%.

Biodesix: This Zacks Rank #2 company is a data-driven diagnostic solutions company. It offers blood-based tests across the lung cancer continuum of care.

The year-over-year earnings growth estimate of BDSX for the upcoming quarter is 13.70%.

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.

To read this article on Zacks.com click here.