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Betting on a stock near its 52-week high, an investor is confronted with one of the oldest and trickiest dilemmas of trading: can it surge higher or is it time to book profits?
The camps are also divided on this dilemma, with one side cautioning investors against 52-week high stocks and the other spurring them on to take a quick ride.
Some of the sliest tricks of successful investing are hidden in plain sight which is often disregarded. Though betting on 52-week high stocks without a clear investment blueprint is outright dangerous, even naïve, clubbing it with the correct parameters can really turn the tide in investors’ favor. We are presenting two arguments in favor of 52-week high stocks, which when clubbed with our other parameters, should help investors earn substantial returns.
Why 52-Week High is a Good Indicator
The 52-week high investment strategy is largely based on the presumptive “adjustment and anchoring bias” principle. This principle suggests that investors generally use the 52-week high price as a reference point and value stocks against this anchor. The fear of an impending price crash and a notion about the stock’s overvaluation often lead a nervous troop of investors to sell them. Their psychological bias cripples their judgment and they are reluctant to add positions on this stock.
However, a select few discover the purple patch and churn profits from it, as they recognize that under reaction on the part of investors might have left the stocks undervalued.
In other words, stock price appreciation is basically fueled by fundamental news pertaining to robust sales, surging profitability, bullish earnings prospects, strategic acquisitions and the like. It might so happen that the stocks have the fundamental strength to climb even higher, but are prevented from reaching that level due to the psychological resistance of investors.
However, when persistent positive news about such stocks finally gets absorbed by the market, investors adjust their expectations accordingly. Renewed investor interest might easily shatter the 52-week high resistance helping stocks to surge higher. The trick is to get in before investors realize it.
The Momentum Angle
Looking from another angle, we can say that investing in stocks near their 52-week high is akin to following the momentum strategy, which is based on the understanding that once a trend is established it is most likely to continue. Market pundits believe that current price levels reflect a stock’s momentum better than past changes. This implies that if a stock is trading close to its 52-week high, chances are that it will perform better in subsequent periods.
Sifting the Correct Parameters
We will screen for stocks which are close to their 52-week highs, but still have strong prospects relative to their respective industries. In addition, we’ve made sure these stocks are relatively undervalued compared to their peers, in terms of earnings as well as sales.
With positive momentum in the stock price, blended with strong earnings growth expectations and great value metrics, we believe these stocks will continue their uptrend for quite some time to come.
Current Price/52 Week High >= .80
(This simply 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 only within 20% of its 52-week high range and is likely to touch the 52-week threshold soon.)
% Change Price – 4 Weeks > 0
(It ensures that the price of the stock has moved north over the past four weeks.)
% Change Price – 12 Weeks > 0
(This metric ensures that the stock has continued its upward price momentum over the past three months as well.)
Price/Sales <= XIndMed
(Lower the ratio, the higher is the benefit for investors as they have to pay a smaller price for the same amount of sales generated by the company.)
P/E using F(1) Estimate <= XIndMed
(This metric measures the amount that an investor will invest in a company to obtain one dollar of that company’s earnings. This metric narrows down the list of stocks to those that are undervalued compared to their peers.)
One-Year EPS Growth F(1)/F(0) >= XIndMed
(This metric will help in zeroing in on stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.)
Zacks Rank = 1
(No screening is complete without our proven 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 beat adversities and outperform the market.)
Current Price >= 5
This parameter will help in screening stocks which are trading at a minimum price of $5 or higher.
Volume – 20 days (shares) >= 100000
Inclusion of this metric ensures that there is a substantial volume of shares that can be traded easily.
Here are five of the 10 stocks that made it through the screen:
Barrick Gold Corporation : Based in Toronto, Canada, it is the largest gold mining company in the world. The company has many advanced exploration and development projects located across five continents. Barrick had 91.9 million ounces (oz) of proven and probable gold reserves and 11.7 billion pounds of copper reserves at the end of 2015. The company has a decent long-term earnings growth expectation of 22.7%.
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS - Free Report) : The company provides public water and sewage services in the state of Sao Paulo, Brazil, which includes Sao Paulo, one of the largest cities in the world. The company's principal shareholder is the Sao Paulo government. The company has a modest long-term earnings growth expectation of 29.7%.
Yamana Gold, Inc. : Founded in 1980, this Toronto-based company is engaged in the exploration and development of precious metal properties in Brazil, Argentina, Chile, Mexico, and Canada. It explores for gold, silver, and copper. Yamana has a long-term earnings growth expectation of 12.4%.
Trinseo SA (TSE - Free Report) : A subsidiary of a subsidiary of Bain Capital Everest Manager Holding SCA, the company has headquarters in Berwyn, PA. It is a materials company which manufactures and markets synthetic rubber, latex, and plastic products in Europe, the Middle East, North America, Latin America, and the Asia Pacific. The average earnings surprise over the last four quarters is 2.2%.
Louisiana-Pacific Corp. (LPX - Free Report) : Headquartered in Nashville, TN, the company together with its subsidiaries is engaged in manufacturing and selling building products primarily for use in new home construction, repair and remodeling, outdoor structures, light industrial and commercial construction. Louisiana-Pacific has registered an impressive positive earnings surprise of 55% in the four trailing quarters.
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 Research Wizard trial 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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 High-Flying Stocks with More Gain in Store
Betting on a stock near its 52-week high, an investor is confronted with one of the oldest and trickiest dilemmas of trading: can it surge higher or is it time to book profits?
The camps are also divided on this dilemma, with one side cautioning investors against 52-week high stocks and the other spurring them on to take a quick ride.
Some of the sliest tricks of successful investing are hidden in plain sight which is often disregarded. Though betting on 52-week high stocks without a clear investment blueprint is outright dangerous, even naïve, clubbing it with the correct parameters can really turn the tide in investors’ favor. We are presenting two arguments in favor of 52-week high stocks, which when clubbed with our other parameters, should help investors earn substantial returns.
Why 52-Week High is a Good Indicator
The 52-week high investment strategy is largely based on the presumptive “adjustment and anchoring bias” principle. This principle suggests that investors generally use the 52-week high price as a reference point and value stocks against this anchor. The fear of an impending price crash and a notion about the stock’s overvaluation often lead a nervous troop of investors to sell them. Their psychological bias cripples their judgment and they are reluctant to add positions on this stock.
However, a select few discover the purple patch and churn profits from it, as they recognize that under reaction on the part of investors might have left the stocks undervalued.
In other words, stock price appreciation is basically fueled by fundamental news pertaining to robust sales, surging profitability, bullish earnings prospects, strategic acquisitions and the like. It might so happen that the stocks have the fundamental strength to climb even higher, but are prevented from reaching that level due to the psychological resistance of investors.
However, when persistent positive news about such stocks finally gets absorbed by the market, investors adjust their expectations accordingly. Renewed investor interest might easily shatter the 52-week high resistance helping stocks to surge higher. The trick is to get in before investors realize it.
The Momentum Angle
Looking from another angle, we can say that investing in stocks near their 52-week high is akin to following the momentum strategy, which is based on the understanding that once a trend is established it is most likely to continue. Market pundits believe that current price levels reflect a stock’s momentum better than past changes. This implies that if a stock is trading close to its 52-week high, chances are that it will perform better in subsequent periods.
Sifting the Correct Parameters
We will screen for stocks which are close to their 52-week highs, but still have strong prospects relative to their respective industries. In addition, we’ve made sure these stocks are relatively undervalued compared to their peers, in terms of earnings as well as sales.
With positive momentum in the stock price, blended with strong earnings growth expectations and great value metrics, we believe these stocks will continue their uptrend for quite some time to come.
Current Price/52 Week High >= .80
(This simply 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 only within 20% of its 52-week high range and is likely to touch the 52-week threshold soon.)
% Change Price – 4 Weeks > 0
(It ensures that the price of the stock has moved north over the past four weeks.)
% Change Price – 12 Weeks > 0
(This metric ensures that the stock has continued its upward price momentum over the past three months as well.)
Price/Sales <= XIndMed
(Lower the ratio, the higher is the benefit for investors as they have to pay a smaller price for the same amount of sales generated by the company.)
P/E using F(1) Estimate <= XIndMed
(This metric measures the amount that an investor will invest in a company to obtain one dollar of that company’s earnings. This metric narrows down the list of stocks to those that are undervalued compared to their peers.)
One-Year EPS Growth F(1)/F(0) >= XIndMed
(This metric will help in zeroing in on stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.)
Zacks Rank = 1
(No screening is complete without our proven 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 beat adversities and outperform the market.)
Current Price >= 5
This parameter will help in screening stocks which are trading at a minimum price of $5 or higher.
Volume – 20 days (shares) >= 100000
Inclusion of this metric ensures that there is a substantial volume of shares that can be traded easily.
Here are five of the 10 stocks that made it through the screen:
Barrick Gold Corporation : Based in Toronto, Canada, it is the largest gold mining company in the world. The company has many advanced exploration and development projects located across five continents. Barrick had 91.9 million ounces (oz) of proven and probable gold reserves and 11.7 billion pounds of copper reserves at the end of 2015. The company has a decent long-term earnings growth expectation of 22.7%.
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS - Free Report) : The company provides public water and sewage services in the state of Sao Paulo, Brazil, which includes Sao Paulo, one of the largest cities in the world. The company's principal shareholder is the Sao Paulo government. The company has a modest long-term earnings growth expectation of 29.7%.
Yamana Gold, Inc. : Founded in 1980, this Toronto-based company is engaged in the exploration and development of precious metal properties in Brazil, Argentina, Chile, Mexico, and Canada. It explores for gold, silver, and copper. Yamana has a long-term earnings growth expectation of 12.4%.
Trinseo SA (TSE - Free Report) : A subsidiary of a subsidiary of Bain Capital Everest Manager Holding SCA, the company has headquarters in Berwyn, PA. It is a materials company which manufactures and markets synthetic rubber, latex, and plastic products in Europe, the Middle East, North America, Latin America, and the Asia Pacific. The average earnings surprise over the last four quarters is 2.2%.
Louisiana-Pacific Corp. (LPX - Free Report) : Headquartered in Nashville, TN, the company together with its subsidiaries is engaged in manufacturing and selling building products primarily for use in new home construction, repair and remodeling, outdoor structures, light industrial and commercial construction. Louisiana-Pacific has registered an impressive positive earnings surprise of 55% in the four trailing quarters.
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 Research Wizard trial 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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »