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 52-week highs are not necessarily overpriced.
Investors, in fact, 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 times, stocks hitting 52-week highs 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. However, 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 stocks that hit 52-week high recently (trading near the high level) with significant 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 in 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 a 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 substantial volume of shares, so trading is easier.
Here are five of the 21 stocks that made it through the screen:
Brinker International, Inc. (EAT - Free Report) primarily owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. This Zacks #1 Ranked player delivered a trailing four-quarter negative earnings surprise of 52.7%, on average.
Target Corporation (TGT - Free Report) has evolved from just being a pure brick-&-mortar retailer to an omni-channel entity. The company currently sports a Zacks Rank of 1. It pulled off a trailing four-quarter earnings surprise of 37.6%, on average.
DaVita Inc. (DVA - Free Report) is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failures, also known as the end stage renal disease (ESRD). The company currently flaunts a Zacks Rank #1. It recorded a trailing four-quarter earnings surprise of 28.2%, on average.
TRI Pointe Group, Inc. (TPH - Free Report) is involved in the design, construction and sale of single-family homes. This Zacks #1 Ranked player witnessed a trailing four-quarter negative earnings surprise of 42%, on average.
PennyMac Financial Services, Inc. (PFSI - Free Report) provides financial services primarily in the United States. The company conducts its business in two segments — mortgage banking and investment management. At present, the stock sports a Zacks Rank of 1. It pulled off a trailing four-quarter surprise of 26.2%, on average.
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