All three major U.S. indexes closed at all-time highs Monday, having rebounded quickly from a selloff that began after the group hit new heights on July 12. Stocks then pulled back on Tuesday, in a sign that second quarter earnings season could be a wild ride for the market.
Tuesday’s drop came ahead of a huge stretch of earnings, with reports due from the ‘big five’ tech companies—Apple, Amazon, Alphabet, Facebook, Microsoft—that account for nearly 25% of the total market capitalization of the S&P 500 index. The outsized impact of these stocks and the resurgence of other big tech and growth names has fueled the recent surge to start the third quarter (also read:
Big Tech Earnings Preview: Apple, Amazon and Other Market Movers).
Wall Street might use Q2 earnings season as a chance to take home more profits, especially since the quick rebound from the last downturn pushed many tech names near frothy technical levels once again.
That said, investors with long-term outlooks shouldn’t be worried about buying strong stocks at or near new highs. And always remember trying to time the market and stocks is extremely difficult...
Image Source: Zacks Investment Research Don't Be Afraid of New Highs
Some investors might prefer not to buy stocks at new highs. But if somebody asked you what the best stocks in your portfolio are, it’s likely you would name the stocks moving up the most.
The most basic idea is that the winners in your portfolio are the ones going up. If a stock is underperforming the market or going down, you'll quickly identify it as one of your worst holdings. Therefore, it makes sense that some of these stocks will be reaching new highs along the way.
Many investors are hesitant to buy stocks making new 52-week highs. But there really isn’t any reason to be. Some may worry that they have already missed the mark at that point, or that now it has more room to fall. Still, a stock making a new 52-week high is a ‘good thing,’ just as one falling to a new 52-week low is a ‘bad thing.’
On top of that, would the person who doesn’t want to buy stocks making new highs be upset if a stock they owned broke out to a new 52-week high? Statistics have also shown that stocks making new highs have a tendency of making even higher highs. And aren’t these the stocks we all dream about?
Now obviously, the fundamentals need to be there, and you should try to keep an eye on valuations. But if you were in a stock making new highs and cheering it on, it seems odd to be afraid of one doing the same just because you haven't bought it yet.
Think about this: A stock just made a new-52 week high, which is great news. Guess what? Last year it made a new 52-week high as well. And the year before that. And the year before that. Can you imagine all the money you'd be leaving on the table if you were afraid of being in stocks every time they made a new high?
• Current Price/52-Week High greater than or equal to .80
Stocks that are either at a new 52-week high, or have just hit it and are still trading within 20% of it, or are climbing towards their 52-week high and are within a 20% striking distance.
• Percent Change in Price over 12 Weeks greater than 0
Even though we're looking for stocks trading near their highs, I want to make sure the price momentum over the last 3 months is positive.
• Percent Change in Price over 4 Weeks greater than 0
The same goes for the last month as well.
• Zacks Rank equal to 1
Only Zacks Strong Buys for this one.
• Price/Sales Ratio less than or equal to Industry Median
The P/S ratio shows how much you're paying for every $1 of sales the company makes. For this screen, we're requiring the P/S ratio to be less than the median P/S for its Industry. Note: different industries will have different averages or medians for different items. A P/S of 1 is not such a great bargain if the median for its Industry is 0.7. But it's a great find if the Industry's median is 1.5. This parameter lets us focus in on 'discounted' valuations germane to their industry. And this allows these stocks to still be considered undervalued even as their stock price continues higher.
• P/E (using F1 Estimates) less than or equal to Industry Median
Just like the P/S ratio, we're looking for stocks whose P/E is below the median for their respective Industry. Including proven valuation metrics when using price momentum screens gives the trader a significant advantage.
• Projected One Year EPS Growth F(1)/F(0) greater than or equal to Industry Median
While the P/S and P/E ratios searched for stocks with valuations below their Industry's median. This item is looking for stocks with projected growth rates above the median for its Industry. In order for a stock to continue to go higher, there needs to be a reason for it to do so. And strong growth, of course, is an important part of that.
• Current Avg. 20-Day Volume greater than Previous Week's Avg. 20-Day Volume
This helps find stocks where the volume has increased in the recent week vs. the previous week. Once again, if the price is climbing on increased volume, that shows increased demand or buying coming in. And the more buying demand there is for a stock, the more it should climb.
• All of the above parameters are applied to stocks with a Price greater than or equal to $5 and an Average 20-Day Volume of greater than or equal to 100,000 shares. • Percent Change in Price over 12 Weeks + Percent Change in Price over 4 Weeks equal to Top # 5
The screen is then narrowed down to produce no more than 5 stocks at a time. The way we're doing it with this item is by combining the percentage price change for both the 12-week and 4-week periods to select the top 5 stocks. Why? If the 12-week % price change is solid, but the 4-week change is relatively weak, that might mean the stock is retreating from its high rather than advancing towards it. On the other hand, if the 12-week gain came largely from just the last 4 weeks worth of gains; while that's impressive, it shows that the trend prior to the most recent period wasn't as robust. This item tries to find the best gainers on both time horizons in an effort to see that momentum carries forward.
Here are two of the three stocks that made it through today’s screen… Lands End, Inc. ( LE Quick Quote LE - Free Report) AutoNation, Inc. ( AN Quick Quote AN - Free Report)
Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.
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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/ .