Investors generally use 52-week high as an indicator to pick stocks. This is because stocks near that level are perceived to be winners.
However, considering the high price, investors often wonder if the stock is overpriced. While the speculations are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, investors might lose out on top gainers in an attempt to avoid the steep prices of stocks that are near their 52-week high mark.
A good stock can maintain the momentum and keep scaling new highs. So, more information on a stock is necessary to understand whether there is scope for further upside.
Here we discuss a strategy to find the right stocks, which borrows 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 having potential. This is because investors fear that the stocks are overvalued, and expect the price to crash.
In fact, overvaluation is 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 indicate 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 dominates 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 Zacks Rank, which has proved its worth since 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 39 stocks that made it through the screen:
Hamilton, Bermuda-based Helen of Troy Limited HELE is a leading consumer products player that operates through a diversified portfolio of renowned brands. Helen of Troy operates through three major segments — Housewares, Health & Home and Beauty. The Zacks #1 Ranked player delivered average beat of 12.88% in the previous four quarters.
Based in Wyomissing, PA, Penn National Gaming, Inc. PENN is a leading, multi-jurisdictional owner and manager of gaming and racing facilities with video gaming terminal operations, and focuses on slot machine entertainment. The company has a vast geographical footprint and boasts a huge portfolio. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 6.05% in the last four quarters.
Headquartered in Buenos Aires, Argentina, Arcos Dorados Holdings Inc. ARCO operates as a franchisee of McDonald's with its operations divided in Brazil; North Latin America division; South Latin America and the Caribbean division. It also runs quick service restaurants in Latin America and the Caribbean. Currently sporting a Zacks Rank #1, the company delivered average positive surprise of 16.67% in the last four quarters.
Tempe, AZ-based Insight Enterprises Inc. NSIT is a global direct marketer of brand name computers, hardware and software. The company markets to small-and-medium-sized businesses through a combination of a strong outbound telemarketing sales force, electronic commerce, electronic marketing and direct mail catalogs. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 12.52% in the last four quarters.
New York-based Bristol-Myers Squibb BMY is a global specialty biopharmaceutical company focused on the development of treatments targeting serious diseases. Its key oncology products include Opdivo, Sprycel, Yervoy and Empliciti. The company came up with average four-quarter positive earnings surprise of 8.3%, and carries a Zacks Rank #2.
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.
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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
Click to get this free report Penn National Gaming, Inc. (PENN) : Free Stock Analysis Report Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report Helen of Troy Limited (HELE) : Free Stock Analysis Report Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report Insight Enterprises, Inc. (NSIT) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research