A 52-week high generally works 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 level. 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.
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 “buy high, sell higher.”
52-Week High: A Good Indicator
Many a time, stocks hitting 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 imminent 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 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 their peers, in terms of earnings as well as sales, ensuring continuation of the 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 investors 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 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. 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 35 stocks that made it through the screen:
Verint Systems Inc. is a leading provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. Currently sporting a Zacks Rank #1, the company has a trailing four-quarter average positive surprise of 12.84%.
Integer Holdings Corporation is a Frisco, TX-based manufacturer and developer of medical devices and components, primarily for original equipment manufacturers, which depend on it to design, develop and produce intellectual property protected medical device technologies. The company has an average four-quarter positive earnings surprise of 9.73%. It carries a Zacks Rank #2.
AMN Healthcare Services Inc., based in San Diego, CA, is a travel healthcare staffing company. It recruits and places nurses, physicians and other healthcare professionals in acute-care facilities, physician practice groups, and other healthcare facilities. The company has an average trailing four-quarter positive earnings surprise of 4.17% and carries a Zacks Rank #2.
Xilinx, Inc. is a San Jose, CA based company, which designs and manufactures a broad range of high-performance, high-density programmable logic devices, such as field-programmable gate arrays and complex-programmable logic devices. Currently carrying a Zacks Rank #2, the company has an average trailing four-quarter positive surprise of 6%.
United States Cellular Corporation is one of the leading wireless companies in the United States. The company provides wireless service coverage for Telephone and Data Systems in select midwest markets. It also caters to both retail consumers and business customers, offering a wide range of products and services, including local, regional and national calling plans, enhanced wireless services, mobile messaging, prepaid services, office products, data services and roadside assistance. The company has an average four-quarter positive earnings surprise of 108.11% and carries a Zacks Rank #2.