Investors generally consider 52-week high as a good criterion to determine an entry or exit point for a given stock. However, stocks touching new 52-week highs are often predisposed to profit taking, resulting in pullbacks and trend reversals.
Moreover, 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 =1
No screening is complete without the Zacks Rank, which has proved its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) have always managed to brave adversities and beat the market average. 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 39 stocks that made it through the screen: Caleres ( CAL Quick Quote CAL - Free Report) designs, sources and markets footwear for men and women, selling through retail stores, e-commerce websites and at wholesale. This Saint Louis, MO-based company owns brands like Nike, Skechers, Bearpaw, Converse, Vans, New Balance, Adidas, Asics, Sperry and Sof Sole, LifeStride, Dr. Scholl's, Fergalicious, Naturalizer and Carlos. The company has a trailing four-quarter earnings surprise of 979.69%, on average, and a Zacks Rank #1 at present. Based in New York, G-III Apparel Group ( GIII Quick Quote GIII - Free Report) manufactures, designs and distributes apparel and accessories of licensed, owned and private label brands. Its product line includes dresses, sportswear, swimwear, women’s suits, performance wear, handbags, footwear, small leather goods, cold weather accessories and luggage. G-III's brand strength and robust business strategies appear encouraging. Management remains optimistic about its portfolio of brands including the five powerful names, DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. The company, which is currently Zacks #1 Ranked, pulled off a trailing four-quarter earnings surprise of 122.75%, on average. Headquartered in Hamilton, Bermuda, Signet Jewelers Limited ( SIG Quick Quote SIG - Free Report) is a retailer of diamond jewellery, watches and other products. The company operates in the United States, Canada, the U.K., Puerto Rico, the Republic of Ireland, and the Channel Islands. The company is often considered as the leading retailer of diamond jewellery. This Zacks #1 Ranked player has a trailing four-quarter positive earnings surprise of 58.3%, on average. Headquartered in Denton, TX, Sally Beauty Holdings ( SBH Quick Quote SBH - Free Report) is an international specialty retailer and distributor of professional beauty supplies. It is one of the largest distributors of beauty products in the United States. Growing online business and strength in Transformation Plan have been contributing to its overall performance. Also, its efforts to enhance customers’ experience coupled with prudent acquisitions are encouraging. The company, which is currently Zacks #1 Ranked, pulled off a trailing four-quarter earnings surprise of 37.76%, on average. GMS Inc. ( GMS Quick Quote GMS - Free Report) 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 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. 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