A 52-week high level works as an indicator for investors as stocks near that level are considered winners.
However, investors often wonder if the high price has made the stock overpriced. While they are not totally incorrect, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, an investor might miss out on top gainers in a bid to avoid the steep prices of stocks that are near the 52-week high mark.
However, a stock can maintain the momentum and keep scaling new highs with time. So, one should take a more informed approach to understand if any further upside is left.
Here we discuss a strategy to find the right stocks:
Borrowing from the basics of momentum investing, this technique bets on the catchphrase “buy high, sell higher.”
52-Week High: A Good Indicator
Many a time, stocks hitting a 52-week high are prevented from scaling higher despite potential due to the psychological bias of investors, who fear that the stocks are overvalued and a price crash is impending.
In fact, overvaluation is quite natural for most of these stocks as investors’ particular attention (or willingness to pay premium) has helped them reach the level. But that doesn’t always mean an impending decline. The 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 dominate 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 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 <=2
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 brave adversities and beat the market. You can see the complete list of today’s Zacks #1 Rank stocks here.