Nine hot stocks, including Nvidia, that have become more attractive by this critical metric

By Philip van Doorn

For this group of soaring stocks, analysts' earnings estimates have been rising more quickly than the share prices

Exactly a month ago, we pointed out that although Nvidia Corp.'s stock had risen 553% from three years earlier, its forward price-to-earnings valuation had declined. With so much in flux, as analysts rush to increase earnings estimates for tech-oriented companies whose sales and profits have been soaring, or are expected to do so, it is time to do another screen to highlight companies whose share prices have been rising quickly, but for which consensus rolling 12-month earnings estimates have been rising at a more rapid pace.

Take a look at this chart showing how Nvidia's forward P/E ratio has moved up and down over the past year:

A stock's forward P/E ratio is the share price divided by the consensus rolling 12-month earnings-per-share estimate among analysts polled by FactSet. This is an important valuation metric for stocks. Over long periods, higher stock prices can be supported as analysts working for brokerage firms follow the old "beat-and-raise" pattern with their earnings estimates.

There has been a seasonal pattern with Nvidia's P/E spiking into or just after the company has announced its quarterly results, and then declining as analysts have responded by raising their earnings estimates.

The past four earnings announcements were made on May 22, Feb. 21, Nov. 21, 2023, and Aug. 23, 2023. It would appear from the chart that the pattern is taking longer to play out this time than it did last quarter. Then again, analysts are still reacting to Nvidia's May 22 report and more recent news:

Nvidia's stock packs 50% more upside, says Wall Street's new biggest bullHow Nvidia's new Street-high stock-price target stacks up in the chip sector

Going back to the chart above, Nvidia's forward P/E is lower than it was a year ago, even though its share price has more than tripled. That is remarkable, and there is still no significant competition for the important market that Nvidia essentially created last year: Implementation of graphics-processing units (GPU) by data centers to support their corporate clients' efforts to develop new products and services that make use of generative artificial intelligence.

As Emily Bary recently pointed out, there are other companies poised to show significant sales growth from AI, even if they are not directly competing with Nvidia in the GPU market.

New stock screen - soaring share prices and declining P/E ratios

For this screen, we began with the S&P 500 SPX, which rose 24% for one year through June 19, excluding dividends. The U.S. benchmark's aggregate forward P/E had risen to 21.2 from 19.2 a year earlier.

It turns out that among the S&P 500, 45 were up at least 50% for one year through Wednesday's close. For all but nine of them, forward P/E ratios had risen, which would be expected for soaring stocks.

Here are the nine stocks in the S&P 500 that were up at least 50% for 12 months through Wednesday, but whose forward P/E ratios had declined. Prices are adjusted for any stock splits, including Nvidia's 10-for-1 split after the close on June 10. The table is sorted by one-year price change.

   Company                           Ticker   1-year price change through June 19  Forward P/E  Forward P/E one year ago 
   Nvidia Corp.                       NVDA                                   218%         44.6                      50.2 
   Micron Technology Inc.              MU                                    127%         20.3                       N/A 
   Western Digital Corp.              WDC                                     98%         10.1                       N/A 
   Seagate Technology Holdings PLC    STX                                     65%         18.8                      28.2 
   Progressive Corp.                  PGR                                     62%         17.7                      20.6 
   Uber Technologies Inc.             UBER                                    62%         49.5                     107.7 
   Royal Caribbean Group              RCL                                     59%         12.4                      16.7 
   Netflix Inc.                       NFLX                                    59%         33.3                      34.4 
   GE Aerospace                        GE                                     55%         34.5                      36.6 
                                                                                                         Source: FactSet 

Click the tickers for more about each company, including news coverage, estimates, financials, ratings and price targets.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

The year-earlier P/E ratios are marked "N/A" for Micron Technology Inc. (MU) and Western Digital Corp. (WDC), because at that time the 12-month EPS estimates were negative for both companies. Both are semiconductor manufacturers focused on storage memory, as is Seagate Technology Holdings PLC (STX), which is also on the list. This is a cyclical industry group, and analysts are especially enthusiastic about Micron.

Related takes from Therese Poletti:

Once esoteric, liquid-cooling technology will become essential in data centers with Nvidia's newest AI chipsHP Enterprise may be an underrated AI play, and new deal with Nvidia could help

Another Deep Dive: Worried you missed the Nvidia bandwagon? Here are some alternative stocks.

-Philip van Doorn

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06-20-24 1022ET

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