5 Stocks Near 52-Week High: Is There More Upside In Store?

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

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This metric guarantees a continued upward price momentum for the stock over the past three months as well.

Price/Sales

The lower, the better.

P/E using F(1) Estimate

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

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 seeOriginal post