Investors often use a 52-week high as a parameter for stock selection. This is because stocks near that level are perceived as winners.
However, the high price often compels investors to wonder whether the stock is trading at a premium. While the speculations are not completely baseless, all stocks at a 52-week high are not 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 there is scope for further upside.
Here we discuss a strategy to find the right stocks on basics of momentum investing, which follows the “buy high, sell higher” technique.
52-Week High: A Good Indicator
Many a time, stocks hitting a 52-week high fail to scale higher despite potential. This is because investors fear that the stocks are overvalued and apprehend a 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 <=2
No screening is complete without 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 a substantial volume of shares, so trading is easier.
Here are five of the 34 stocks that made it through the screen:
Fremont, CA-based SYNNEX (SNX – Free Report) is a leading business process services company. The company provides a comprehensive range of distribution, logistics and integration services for the technology industry and outsourced services focused on customer engagement to a broad range of enterprises. Currently carrying a Zacks Rank #1, the company has a trailing four-quarter positive surprise of 10.55%, on average.
Ichor Holdings Ltd. (ICHR – Free Report) is engaged in the design, engineering, and manufacture of fluid delivery subsystems and components for semiconductor capital equipment. It primarily offers gas and chemical delivery subsystems that are used in the manufacturing of semiconductor devices. Currently sporting a Zacks Rank #1, the company has an average positive surprise of 16.67% for the last four quarters.
Tech Data Corporation (TECD – Free Report) is a Clearwater, FL-based wholesale distributor of information technology products, logistics management and other value-added services. The company distributes and markets more than 150,000 products from above 600 manufacturers and publishers. This Zacks Rank #2 company has a four-quarter positive earnings surprise of 7.45%, on average.
Tempe, AZ-based Insight Enterprises Inc. (NSIT – Free Report) is a global direct marketer of brand name computers, hardware and software. The company markets to small-and-medium-sized businesses through a combination of a strong outbound telemarketing sales force, electronic commerce, electronic marketing and direct mail catalogs. Currently carrying a Zacks Rank #2, the company has an average positive surprise of 12.52% for the last four quarters.
New York-based Bristol-Myers Squibb (BMY – Free Report) is a global specialty biopharmaceutical company focused on the development of treatments targeting serious diseases. Its key oncology products include Opdivo, Sprycel, Yervoy and Empliciti. The company came up with an average four-quarter positive earnings surprise of 8.3% and carries a Zacks Rank #2.
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.
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