A 52-week high generally serves as an indicator for investors as stocks near that level are perceived to be winners.
No matter how disciplined and systematic investors are, equity market volatility will always manage to affect some in the end. Only a few lucky ones have a smooth sail while others fall victim to ad hoc strategies.
More often than not, investors wonder if a high price range has made the stock overpriced. While the apprehensions are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, an investor might miss out on top gainers in an attempt to avoid the steep prices of stocks that are near their 52-week high mark.
A stock can maintain the momentum and keep scaling higher with time. So, one should take a more informed approach to understand if any further upside is left.
One particular strategy advises investors to gamble on stocks that have scaled 52-week highs. This is fairly a new approach in the investing rulebook. Borrowing from the basics of Momentum investing, this technique bets on the principle of buying high and selling higher.
Though skeptics may raise a brow on the mettle of this 52-week high investment strategy, we believe that this, when clubbed with the right set of parameters, will help rake in sizable gains. A wide group of investors today favor stocks with prospects of scaling higher. These investors have mastered the art of finding stocks that have strong upside potential and are still undervalued.
Here we discuss a strategy to find the right stocks.
Borrowing from the basics of momentum investing, this technique bets on “buy high, sell higher.”
52-Week High: A Good Indicator
Many a time, stocks hitting a 52-week high fail to scale higher despite potential. This is because investors fear that the stocks are overvalued and a price crash is impending.
In fact, overvaluation is quite natural for most of these stocks as investors’ focus (or willingness to pay premium) has helped them reach the level. But that does not always mean an impending decline. Factors such as robust sales, surging profit levels, earnings growth prospects and strategic acquisitions that encouraged investors to bet on these stocks could keep them motivated if there is no tangible negative. In other words, the momentum might continue.
Also, when a string of positive developments dominate the market, investors find their under-reaction unwarranted, even if there are no company-specific driving forces.
Setting the Right Filters
We ran a screen to zero in on 52-week high stocks (trading near the high level) that hold tremendous upside potential. The screen includes parameters to shortlist stocks with strong earnings growth expectations, sturdy value metrics and price momentum.
Moreover, the screen filters stocks that are relatively undervalued compared to their peers, in terms of earnings as well as sales, ensuring continuation of their rally for some time.
Current Price/52 Week High >= .80
This is the ratio between the current price and the highest price at which the stock has traded in the past 52 weeks. A value greater than 0.8 implies that the stock is trading within 20% of its 52-week high range.
% Change Price – 4 Weeks > 0
It ensures that the stock price has moved north over the past four weeks.
% Change Price – 12 Weeks > 0
This metric guarantees a continued upward price momentum for the stock over the past three months as well.
Price/Sales <= XIndMed
The lower, the better.
P/E using F(1) Estimate <= XIndMed
This metric measures the amount an investor puts into a company to obtain one dollar of earnings. It narrows down the list of stocks to those that are undervalued compared to the industry.
One-Year EPS Growth F(1)/F(0) >= XIndMed
This helps choose stocks that have higher growth rates than the industry. This is a meaningful indicator, as decent earnings growth adds to investor optimism.
Zacks Rank <=2
No screening is complete without our proven Zacks Rank, which has proved its worth since its inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to brave adversities and beat the market. You can see the complete list of today’s Zacks #1 Rank stocks here.
Current Price >= 5
This parameter will help screen stocks that are trading at $5 or higher.
Volume – 20 days (shares) >= 100000
Inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.
Here are five of the 33 stocks that made it through the screen:
Rent-A-Center, Inc. RCII headquartered in Plano, TX, is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories. Currently sporting a Zacks Rank #1, the company delivered average positive surprise of 73.89% in the last four quarters.
Based in Philadelphia, PA, Comcast Corporation CMCSA is a global media and technology company with three primary businesses — Comcast Cable, NBCUniversal and Sky. The company pulled off average four-quarter earnings surprise of 7.88%, and has a Zacks Rank of 2.
Group 1 Automotive, Inc. GPI is one of the leading automotive retailers in the world. Apart from selling new and used vehicles, Group 1 Automotive offers vehicle financing and insurance and service contracts. Further, it provides maintenance and repair services, along with sale of replacement parts and aftermarket automotive products. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 5.96% in the last four quarters.
Headquartered in Vernon Hills, IL, CDW Corporation CDW is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, the United Kingdom and Canada. The company pulled off average four-quarter earnings surprise of 8.91%, and has a Zacks Rank of 2.
Minneapolis, MN-based Target Corporation TGT operates as a general merchandise retailer in the United States. The company provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids. The company is a Zacks #2 Ranked player and delivered average beat of 2.55% in the previous four quarters.
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 trial to the Research Wizard 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
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
CDW Corporation (CDW) : Free Stock Analysis Report
Comcast Corporation (CMCSA) : Free Stock Analysis Report
Rent-A-Center, Inc. (RCII) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research