Occasionally, I sort stocks by price-to-earnings (P/E ) ratios
looking for trading opportunities. This idea is well-known to value
investors who often start theirinvestment selection process with
low P/E stocks.
I think it can be useful to flip that idea around and look at
the stocks with the highest P/E ratios. Sometimes that listwill
include rapidly growing companies that are shaping consumer and
industrial markets. Lists of high P/E stocks will also almost
always include stocks that make great short candidates oroffer
trading ideas based on put options.
There are at least 10 stocks with amarket cap of more than $400
million and a triple-digit P/E ratio based onearnings from the past
12 months and forecasted earnings for the next 12 months. One of
these seems to be an especially appealing trading candidate,
Wright Medical Group (Nasdaq: WMGI)
Wright makes medical devices used in ankle, knee and hip
surgery. The company believes it can be a market leader in products
used for foot and ankle surgery, and recently completed
anacquisition that could help it deliver growth in that area.
This is a $3.7 billion market, growing 8-10% a year, according
to company estimates. Wright expects to be able to deliver
above-average growth in thismarket segment , which makes up about
40% of the company's current sales. The majority of sales presently
come from products made for hip and knee surgeries, an area with
almost no projected growth.
This could be a good long-term strategy. Wright expects to move
from a slow growing market and expand into a faster growing market.
The numbers look good for Wright, assuming the company can meet its
sales andprofit targets, but the stock price seems to have gotten
ahead of the fundamentals.
For 2012, Wright is expectingrevenue of about $480 million. The
company reported earnings of 69 cents a share in 2011, and analysts
expectearnings per share (
) of 21 cents this year and 11 cents next year. The stock is
trading at about $20.65 giving it a P/E ratio of 737.5 based onEPS
in the past 12 months and 188 times next year's estimates.
Analysts expect sales growth of about 1.4% next year and average
annual earnings growth of 10.1% during the next five years.
FifteenWall Street analysts have assigned a rating to the stock and
10 deem Wright a "hold." Very few stocks are rated "sells," meaning
that hold is generally the lowest rating a firm will assign to a
The company does have a significant amount ofcash , about $8 a
share, on itsbalance sheet . Thebook value of $13.23 a share might
be a good target based on the fundamentals for now.
The technical picture backs up the fundamentals and points to a
possible decline in the price of Wright.
Thestochastics indicator isbearish on the monthly and weekly
time frames shown above. A head-and-shoulders pattern is visible on
the weekly chart with a downside target of about $17, almost 18%
below the recent price. Additional downside is possible given the
Put options offer a way to profit from a decline in Wright
without shorting the stock. Puts with astrike price of $20 expiring
in February are trading for about 85 cents. If Wright reaches $17,
then these puts would be worth at least $3.
Companies that have P/E ratios above 100 are rarely
goodinvestments and Wright seems like a company trading well above
itsfair value . This is a low-risk trade based on the small dollar
amount required to open a position. The potential rewards are twice
as great as the risk.
Action to Take -->
Buy WMGI Feb 20 Puts for $1 or less. Do not use a stop-loss. Set
initialprice target at $3 for a potential 200% gain in two
This article originally appeared on TradingAuthority.com:
Sell-Off That Could Make You 200% Profits
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