Investors generally consider 52-week high as a criterion to pick stocks. This is because stocks near that level are perceived to be winners.
However, 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 there is scope for further upside.
Here, we discuss a strategy to find the right stocks. This strategy 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.
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 stocks that hit 52-week high recently (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 the 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.
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 substantial volume of shares, so trading is easier.
Here are five of the 25 stocks that made it through the screen:
Headquartered in Tempe, AZ, Amkor Technology, Inc. AMKR is one of the largest providers of semiconductor packaging and test services. It packages and tests integrated circuits (ICs) for chip manufacturers, fabless semiconductor companies and contract foundries. This Zacks #1 Ranked player delivered a trailing four-quarter negative earnings surprise of 114.45%, on average.
Based in Parsippany, NJ, BG Foods Inc BGS along with its subsidiaries manufactures, sells and distributes high quality, shelf stable, frozen food and household products across the United States, Canada and Puerto Rico. The company currently sports a Zacks Rank #1. It pulled off a trailing four-quarter positive earnings surprise of 5.36%, on average.
Based in Venlo, the Netherlands, QIAGEN N.V. QGEN is one of the world’s leading providers of technologies and products for the separation, purification and handling of nucleic acids DNA/RNA. The company provides innovative technologies and products for pre-analytical sample preparation and molecular diagnostics solutions. The company currently carries a Zacks Rank #1. It delivered a trailing four-quarter positive earnings surprise of 1.54%, on average.
Idaho-based Micron Technology MU has established itself as one of the leading worldwide providers of semiconductor memory solutions. Through global brands, namely Micron, Crucial and Ballistix, Micron manufactures and markets high-performance memory and storage technologies including Dynamic Random-Access Memory (DRAM), NAND flash memory, NOR Flash, 3D XPoint memory and other technologies. The company carries a Zacks Rank #2 currently. It pulled off a trailing four-quarter positive surprise of 17.43%, on average.
Silver Spring, MD-based United Therapeutics Corporation UTHR markets four medicines in the United States to treat pulmonary arterial hypertension — Remodulin, an injectable formulation of treprostinil; Orenitram; an oral version of treprostinil; Tyvaso, an inhaled version of treprostinil, and Adcirca (tadalafil; also sold by Eli Lilly as Cialis for erectile dysfunction) tablets. The company carries a Zacks Rank #2 currently. It pulled off a trailing four-quarter positive surprise of 14.22%, on average.