While betting on a stock near its 52-week high, investors are faced with one of the trickiest questions — will the stock scale higher or are it the right time to book profits?
Though betting on 52-week high stocks without a foolproof investment plan is perilous and even naïve, clubbing it with the correct parameters can turn the tide in investors’ favor.
In this screening article, we discuss the 52-week investment plan. While market analysts may be divided in their opinion regarding the 52-week high investment technique, many of them believe that 52-week high stocks which are still undervalued and have strong upside potential can be lucrative bets.
52-Week High: A Good Indicator
Stocks near 52-week highs often instill the presumptive “adjustment and anchoring bias” in the minds of investors. This principle works on the belief that investors use the 52-week high price as a reference point and value stocks against this anchor.
Many a times, such stocks 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.
A few of the stocks remain undervalued due to prolonged under reaction on part of investors despite bullish growth drivers. Meanwhile, news pertaining to robust sales, surging profit levels, bullish earnings prospects and strategic acquisitions can drive the stock higher.
However, when a string of positive developments dominate the market, investors find their under-reaction unwarranted and the renewed interest might drive stocks beyond the 52-week high bar. Wall Street’s fast paced trading makes it imperative for investors to step in before the market gets a whiff of it.
Also, recent academic research reveals that if a stock’s current price is near its 52-week high, there are high chances that it will outperform peers in the subsequent period. According to researchers George and Hwang, holding 52-week high stocks for six months resulted in an average monthly gain of 0.45% between 1963 and 2001. Encouragingly, this is twice the gain that can be garnered from similar momentum-based strategies.
Setting the Right Filters
Our diligent screening technique has been deployed to find 52-week high stocks that hold tremendous potential compared to their respective industries. The added parameters are strong earnings growth expectations, sturdy value metrics and positive price momentum.
These stocks are relatively undervalued compared to their peers, in terms of earnings as well as sales, which make us believe that they will continue their rally for quite some time.
Current Price/52 Week High >= .80
This simply 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 and is likely to touch the 52-week high mark soon.
% 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 their peers.
One-Year EPS Growth F(1)/F(0) >= XIndMed
This helps choose stocks that have higher growth rates than the industry median. This is a meaningful indicator as decent earnings growth adds to investor optimism.
Zacks Rank = 1
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 which are trading at $5 or higher.
Volume – 20 days (shares) >= 100000
Inclusion of this metric ensures that there is a substantial volume of shares that can be traded easily.
Here are five of the 13 stocks that made it through the screen:
Daqo New Energy Corp. DQ is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. The company has an average positive earnings surprise of 23.21% for the trailing four quarters.
Kennametal Inc. KMT provides wear-resistant products, application engineering, and services of material science to the industrial production, transportation, earthworks, energy, construction, process industries, and aerospace sectors worldwide. We note that the company has beaten the Zacks Consensus Estimate thrice in the preceding four quarters, delivering an average positive earnings surprise of 20.56%.
DXC Technology Company DXC headquartered in Tysons, VA, DXC Technology is the world’s second largest end-to-end IT service provider offering a broad array of professional services to clients in the global, commercial and government markets. The company has surpassed the Zacks Consensus Estimate in all the four preceding quarters, the average surprise being 25.43%.
St. Louis, MO-based Stifel Financial Corp. SF is a financial services and bank holding company. The company has an average four-quarter positive earnings surprise of 8.08%.
Arbor Realty Trust Inc. ABR headquartered in Uniondale, NY, specializes in real estate finance, investing in real estate-related bridge and mezzanine loans, preferred equity, mortgage-related securities and other real estate-related assets. With earnings beat in the last four quarters, the company has an average surprise of 31.89%.
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.
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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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