More often than not, investors wonder if the high price range has made the stock overpriced. While the apprehensions are not completely groundless, all stocks hitting a 52-week high are not necessarily high-priced.
At the same time, a few investors regard the stock as an overpriced one at that level. While they are not entirely mistaken, all stocks hitting a 52-week high aren’t expensive.
In fact, in order to avoid stocks that are trading near their 52-week highs, an investor might miss out on top gainers.
A stock can continue the momentum and keep reaching new highs as time passes. So, a more informed approach to understand if any further upside is left is beneficial for assessing the stock.
Here we will 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 robust 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’ special attention (or willingness to pay premium) has helped them achieve 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 motivated 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 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.
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 24 stocks that made it through the screen:
Shutterfly, Inc. (NASDAQ:SFLY) manufactures and retails digital personalized products and services. It provides a range of products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print and preserve their digital photos in a creative and thoughtful manner. The company surpassed the Zacks Consensus Estimate in all of the trailing four quarters, the average positive surprise being 12.9%.
AMN Healthcare Services Inc (NYSE:AMN) provides physician and nursing recruitment and placement services for hospitals, clinics, medical centers, government facilities, and other healthcare organizations in travel or permanent assignments. The company has an average four-quarter positive earnings surprise of 4.9%.
CACI International, Inc. (NYSE:CACI) delivers IT applications and infrastructure to improve communications and secure the integrity of information systems and networks, enhance data collection and analysis, and increase efficiency and mission effectiveness. It has beaten the Zacks Consensus Estimate in all of the four trailing quarters, the average positive earnings surprise being 12.5%.
Applied Materials, Inc. (NASDAQ:AMAT) is a supplier of equipment for the fabrication of semiconductor, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules. The company also offers deployment and support services related to the equipment supplied. Surpassing the Zacks Consensus Estimate in all the four quarters, the company has an average positive earnings surprise of 4.8%.
Diodes Incorporated (NASDAQ:DIOD) is a designer, manufacturer and supplier of application-specific standard products in the semiconductor market. The company has topped the Zacks Consensus Estimate in three of the four trailing quarters, the average positive surprise being 46.8%.
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.
Click here to sign up for a free trial to the Research Wizard today.
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
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Shutterfly, Inc. (SFLY): Free Stock Analysis Report
AMN Healthcare Services Inc (AMN): Free Stock Analysis Report
CACI International, Inc. (CACI): Free Stock Analysis Report
Diodes Incorporated (DIOD): Free Stock Analysis Report
Applied Materials, Inc. (AMAT): Free Stock Analysis Report
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