The common investing practice is to chase stocks with a low price-to-earnings (P/E) ratio. That’s because this basic measure of how much investors are spending for $1 worth of earnings speaks of undervaluation. The logic is simple – a stock’s current market price does not justify its higher earnings and therefore leaves room for upside.

But have you ever given it a thought that stocks with a rising P/E can also be worth buying. We’ll tell you why.

Power of Increasing 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 push up its prices. 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, it means that he is willing to shell out $30 for only $1 worth of earnings. Now if the P/E ratio becomes 35 within a short span of time, it means that the person is now ready to pay $35 for only $1 worth of earnings. It shows that the investor 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 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 time frames.)

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 factors narrowed down the universe from over 7,700 stocks to just 13.

Here are five of the 13 stocks that passed the screen:

Valley National Bancorp (VLY - Free Report): This is a bank holding company whose principal subsidiary is Valley National Bank. The company belongs to an industry that has a Zacks Industry Rank in the top 8% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

JinkoSolar Holding Company Limited (JKS - Free Report): This #2 Ranked company is a solar product manufacturer with operations based in Jiangxi Province and Zhejiang Province in China. It belongs to a Zacks Industry Rank in the top 25%.

Premier Inc. (PINC - Free Report): The Zacks Rank #1 company operates as a healthcare alliance. The Zacks Industry Rank of the stock is in the top 44%.

Expedia Inc. (EXPE - Free Report): The Zacks Rank #2 company together with its subsidiaries operates as an online travel company in the United States and internationally. Its Zacks Industry Rank is in the top 38%.

Southern National Bancorp of Virginia Inc. (SONA - Free Report): This is a regional bank. Its Zacks Industry Rank is in the top 6%. It carries a Zacks Rank #2.