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.
Investors might, in fact,lose out on the 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 or not 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
A number of times, stocks hitting a 52-week high fail to scale higher despite having potential. This is because investors fear that the stocks are overvalued andexpect 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 highs recently (trading near the high level) and hold tremendous upside potential. This 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 the 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. 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 substantial volume of shares, so trading is easier.
Here are six of the 61 stocks that made it through the screen:
Target Corporation TGT is a general merchandise retailer which provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids. It also houses food and pet supplies, home furnishings and décor, home improvement, automotive products, and seasonal merchandise. This Zacks #1 Ranked player delivered a trailing four-quarter earnings surprise of 37.6%, on average.
AutoNation, Inc. AN is the largest automotive retailer in the United States. The company also offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other after-market products. In addition, it arranges financing for vehicle purchases through third-party sources. The company currently sports a Zacks Rank #1. It pulled off a trailing four-quarter earnings surprise of 85.5%, on average.
Nu Skin Enterprises, Inc. NUS develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. It flaunts a Zacks Rank of 1, at present. It delivered a trailing four-quarter earnings surprise of 18.7%, on average.
Green Brick Partners, Inc. GRBK is involved in the land acquisition and development, entitlements, design, construction, marketing and sale of residential projects. This Zacks #1 Ranked player recorded a trailing four-quarter earnings surprise of 27.9%, on average.
BMC Stock Holdings, Inc. BMCH provides diversified building products and services to professional builders and contractors chiefly in the residential housing market. Currently, the company currently flaunts a Zacks Rank of 1. It delivered a trailing four-quarter earnings surprise of 38.5%, on average.
Ultra Clean Holdings, Inc. UCTT is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries. This Zacks #1 Ranked player came up with a trailing four-quarter earnings surprise of 39.2%, on average.
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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Ultra Clean Holdings, Inc. (UCTT) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
AutoNation, Inc. (AN) : Free Stock Analysis Report
Nu Skin Enterprises, Inc. (NUS) : Free Stock Analysis Report
BMC Stock Holdings, Inc. (BMCH) : Free Stock Analysis Report
Green Brick Partners, Inc. (GRBK) : Free Stock Analysis Report
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