A 52-week high generally serves as an indicator for investors as stocks near that level are perceived to be winners.
Notably, investors often wonder if the stock is overpriced considering the high price. While the apprehensions are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, an investor might miss out on top gainers in an attempt to avoid the steep prices of stocks that are near their 52-week high mark.
A stock can maintain the momentum and keep scaling new highs. So, one should take a more informed approach to understand if 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 “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 a price crash is impending.
In fact, overvaluation is quite 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 mean 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 our proven Zacks Rank, which has proved its worth since its 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 a substantial volume of shares, so trading is easier.
Here are five of the 22 stocks that made it through the screen:
Abbott Laboratories ABT is an Abbott Park, IL-based global healthcare company devoted to improving life through the development of products and technologies that span the breadth of healthcare. It has a portfolio of leading, science-based offerings in diagnostics, medical devices, nutritionals and branded generic pharmaceuticals. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 1.78% in the last four quarters.
Headquartered in Deerfield, IL, Baxter International Inc. BAX is a global medical technology company. Following the spinoff of its biopharmaceuticals segment, the company provides items such as kidney-dialysis equipment, infusion pumps, and intravenous solutions. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 9.15% in the last four quarters.
First Horizon National Corporation FHN is a financial services company based in Memphis, TN. It is the holding company for First Tennessee Bank and FTN Financial. The company pulled off a four-quarter average positive earnings surprise of 2.68%, and has a Zacks Rank #2.
OUTFRONT Media Inc. OUT is a lessor of advertising space on out-of-home advertising structures and sites across the United States, Canada and Latin America. The company's portfolio primarily consists of billboard displays. Currently sporting a Zacks Rank #1, the company delivered average positive surprise of 3.15% in the last four quarters.
Headquartered in Fairfax, VA, ICF International, Inc. ICFI is a provider of professional services and technology-based solutions to government and commercial clients. The company delivered a four-quarter average positive earnings surprise of 3.23%, and carries a Zacks Rank #2.