A 52-week high level generally works as an indicator for investors as stocks near that level are perceived to be winners.
More often than not, investors wonder if the 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, in an attempt to avoid stocks that are trading near their 52-week high levels, an investor might miss out on top gainers.
A stock can continue the momentum and keep touching new highs as time progresses. So, a more informed approach to understand if any further upside is left is beneficial in these cases.
Here we will discuss a strategy to find the right stocks:
Borrowing from the basics of momentum investing, this technique bets on the catchphrase, “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 doesn’t 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.
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 31 stocks that made it through the screen:
ConocoPhillips (NYSE:COP) is involved in exploration, development and production of crude oil and natural gas worldwide. The company topped the Zacks Consensus Estimate in three of the four trailing quarters with an average positive surprise of 226.9%. It sports a Zacks Rank #1.
Archer Daniels Midland (NYSE:ADM) is one of the leading food processing companies in the world. It procures, transports, stores, processes, and merchandises agricultural commodities and products. The company has an average four-quarter positive earnings surprise of 13.3% and a Zacks Rank #2.
CVS Health (NYSE:CVS) is a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care. Its offerings include pharmacy benefit management services and disease management programs among others. The company has a Zacks Rank #2 and a trailing four-quarter average positive earnings surprise of 2.6%.
Fortinet (NASDAQ:FTNT) is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide. The company delivered an average four-quarter positive earnings surprise of 26.2%. It carries a Zacks Rank #2.
Avnet (NASDAQ:AVT) is one of the world’s largest distributors of electronic components and computer products. The company’s customer base includes original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, original design manufacturers (ODMs), and value-added resellers (VARs). The company delivered an average positive surprise of 7.7% in the trailing four quarters 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.
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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