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. The strategy 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 the Zacks Rank, which has proved its worth since inception. 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 44 stocks that made it through the screen:
Headquartered in Parsippany, N.J., Avis Budget Group CAR operates as a leading vehicle rental operator in North America, Europe and Australasia with an average rental fleet of nearly 650,000 vehicles. The company’s ability to cater to a wide range of mobility demands helps it expand and strengthen global foothold through organic growth. It operates through distinct global brands that focus on different market segments and complement other brands in their respective regional markets. Its fleet expansion and technology enhancement efforts are likely to enhance its offerings. It came up with a four-quarter earnings surprise of 126.22%, on average, and sports a Zacks Rank #1, at present.
Headquartered in El Segundo, CA, Mattel Inc. MAT is the world’s largest manufacturer of toys. Mattel’s portfolio of global brands has vast intellectual property potential. The brands and products are widely classified as Power Brands and Toy Box. The company’s products are sold directly to retailers and wholesalers in most European, Latin American and Asian countries as well as in Australia, Canada and New Zealand through the Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands, and Construction and Arts & Crafts Brands. Owing to its popularity among young boys and girls, the company’s premier brand like Hot Wheels has been the category leader in multiple product segments for several years. It came up with a four-quarter earnings surprise of 121.82%, on average, and sports a Zacks Rank #1, at present.
ON Semiconductor Corporation ON is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. This Phoenix, AZ-based company’s acquisition of Fairchild Semiconductor International makes it a leader in the power semiconductor space. Moreover, the company’s acquisitions of Cypress Semiconductor’s CMOS Image Sensor Business Unit, SANYO Semiconductor, AMI Semiconductor, Analog Devices’ power PC controller business, CMD, Catalyst, and SoundDesign gave it new technical capabilities, some custom ASIC products, higher-margin products, exposure to new end markets and greater product breadth. The company has a trailing four-quarter earnings surprise of 24.66%, on average, and a Zacks Rank #1 at present.
Domiciled in Atlanta, GA, Silicon Motion Technology SIMO is a leading developer of microcontroller ICs for NAND flash storage devices. The semiconductor company also designs, develops and markets high-performance, low-power semiconductor solutions for original equipment manufacturers and other customers. It came up with an earnings surprise of 15.96%, on average, in the last four quarters. The company currently sports a Zacks Rank of 1.
GMS Inc. GMS is a distributor of wallboard and suspended ceilings systems. This Tucker, GA-based company's product consists of wallboard, suspended ceilings systems or ceilings and complementary interior construction products in commercial and residential buildings. GMS is set to expand its footprint in California with the acquisition of Westside Building Material, one of the largest independent distributors of interior building products in the area. The company has a trailing four-quarter earnings surprise of 15.67%, on average, and a Zacks Rank #1 at present.
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
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Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
Mattel, Inc. (MAT) : Free Stock Analysis Report
Silicon Motion Technology Corporation (SIMO) : Free Stock Analysis Report
ON Semiconductor Corporation (ON) : Free Stock Analysis Report
GMS Inc. (GMS) : Free Stock Analysis Report
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