Investors generally consider 52-week high as a criterion to pick stocks. This is because stocks near that level are perceived to be winners.
However, given 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.
A good stock can maintain the momentum and keep scaling new highs. So, more information on a stock is necessary to understand whether or not 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 76 stocks that made it through the screen:
Target Corporation TGT has been making investment in technologies, improving websites and mobile apps and modernizing supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players. Its acquisition of Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products is worth noting. It came up with a four-quarter earnings surprise of 62.05%, on average, and flaunts a Zacks Rank #1, at present.
Popular, Inc. BPOP is a Hato Rey, Puerto Rico-based publicly-owned bank holding company, which provides products and services primarily to institutional and retail customers. It came up with a four-quarter earnings surprise of 62.39%, on average, and has a Zacks Rank #2, at present.
Founded in 1971 and headquartered in New York, Nasdaq Inc. NDAQ is a leading provider of trading, clearing, marketplace technology, regulatory, securities listing, information and public and private company services. Currently carrying a Zacks Rank #2, it delivered an earnings surprise of 8.3%, on average, in the preceding four quarters.
New York-based Arrow Electronics Inc. ARW is one of the world’s largest distributors of electronic components and enterprise computing products. Arrow provides one of the broadest product ranges in the electronic components and enterprise computing solutions distribution industries. The company — which currently carries a Zacks Rank #2 — came up with four-quarter negative earnings surprise of 19.92%, on average.
Headquartered in Atlanta, GA, Invesco Ltd. IVZ – formerly AMVESCAP PLC – operates as an independent investment manager and offers a wide range of investment products and services. The company came up with four-quarter negative earnings surprise of 7.44%, on average, and currently carries a Zacks Rank of 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.
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
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Target Corporation (TGT) : Free Stock Analysis Report
Arrow Electronics, Inc. (ARW) : Free Stock Analysis Report
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Nasdaq, Inc. (NDAQ) : Free Stock Analysis Report
Invesco Ltd. (IVZ) : Free Stock Analysis Report
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