Investors generally consider a 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 its 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 technique borrows from the basics of momentum investing and 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.
Overvaluation is natural for most of these stocks as investors’ focus (or willingness to pay the 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 the 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
The inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.
Here are five of the 40 stocks that made it through the screen: Saskatoon, Canada-based Nutrien Ltd. ( NTR Quick Quote NTR - Free Report) is expected to gain from higher demand for crop nutrients in 2021. Strong grower economics and higher crop prices are driving fertilizer demand globally. Demand for phosphate and potash is expected to remain strong this year. Demand for nitrogen fertilizer also remains healthy in North America, Brazil, and India. Higher selling prices of crop nutrients are also expected to drive its sales and margins. Acquisitions have also strengthened the company’s foothold in the growing Brazilian agricultural market. The company, which is currently Zacks #1 Ranked, pulled off a trailing four-quarter earnings surprise of 127.58%, on average. Headquartered in Las Vegas, Boyd Gaming Corporation ( BYD Quick Quote BYD - Free Report) has been benefiting from initiatives to strengthen current operations and growth through capital investment as well as other strategic measures. Moreover, expansion of online betting offerings along with FanDuel partnership bodes well. Going forward, the company is optimistic about online gaming prospects in Louisiana. Also, signs of improvement are being noticed in its destination business. Although the number of destination travelers remains below the pre-pandemic levels, a higher rate of hotel reservations coupled with pent-up demand for non-gaming amenities indicates revival. The company has a trailing four-quarter earnings surprise of 85.42%, on average, and a Zacks Rank #1 at present. Headquartered in Hamilton, Bermuda, Signet Jewelers Limited ( SIG Quick Quote SIG - Free Report) is a retailer of diamond jewelery, 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 jewelery. This Zacks #1 Ranked player has a trailing four-quarter earnings surprise of 77.45%, on average. Incorporated in Delaware, AutoNation, Inc. ( AN Quick Quote AN - Free Report) is the largest automotive retailer in the United States. A diversified product mix and multiple streams of income reduce its risk profile and bode well for top and bottom-line growth. Strong footprint, large dealer network and, store expansion efforts are set to drive profitability. Increased focus on cost discipline is anticipated to aid margins. With the launch of its digital platform, AutoNation Express, the company has stepped up its digitization game, which will help the firm to boost profitability. The impending buyout of 11 stores and a collision center from Peacock Automotive Group is set to buoy AutoNation’s portfolio and add $380 million in its annual revenues. The company has a trailing four-quarter earnings surprise of 48%, on average, and a Zacks Rank #1 at present. Headquartered in Wilmington, MA, Onto Innovation ( ONTO Quick Quote ONTO - Free Report) operates as the leading manufacturer of avant-garde process control tools that perform macro defect inspections and metrology, and lithography systems. The company is well-positioned to benefit from strong customer demand for its solutions across the semiconductor value chain while improving its operational efficiency. It estimates new customers for planar films, an inspection of image sensors, and the increasingly critical ramp of panel-level packaging to add more than $350 million to its served markets in 2022. The company, which is currently Zacks #1 Ranked, pulled off a trailing four-quarter earnings surprise of 15.5%, 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. 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