Stocks nearing a 52-week high make investors take a closer look at it for possibilities of a further rise. The truth is there is no crystal ball or time-tested strategy that can help one determine the impending trend.
Though touted as one of the riskier investing techniques, a sizable number of investors are picking undervalued stocks near 52-week high with the conviction that they can scale higher.
Here at Zacks we will help you hitch a quick ride on the 52-week high bandwagon to earn some profits. Clubbing 52-week high stocks with the correct set of parameters is all you need to turn the tide in your favor.Our screen will provide you with a clear investment strategy and help you minimize the risks associated with any ad-hoc strategies.
Decoding the 52-Week High Trend
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 start dominating 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 has 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.
Selecting the Right Parameters
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 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. 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 seven of the 23 stocks that made it through the screen:
Forestar Group, Inc. formerly known as Forestar Real Estate Group Inc. FOR operates in two business segments: real estate and natural resources. The company has a massive average positive earnings surprise of 340.7%, beating estimates thrice in the trailing four quarters.
Incorporated in 1959, Houston, TX-based McDermott International Inc. MDR is an engineering and construction company, solely focused on the offshore oil and gas business. The company has a whopping average earnings surprise of 474.0%, beating estimates in all of the trailing four quarters.
Coherent Inc.COHR designs, manufactures, and supplies electro-optical systems and medical instruments utilizing laser, precision optic and microelectronic technologies. The company beat estimates in all of the trailing four quarters, at an average of 10.0%.
Cambrex CorporationCBM manufactures and markets a broad line of specialty chemicals and commodity chemical intermediates. The company also manufactures chemicals as per customer specifications. With three earnings beat in the trailing four quarters, the company has an average positive surprise of 19.8%.
Teradyne, Inc.TER is a manufacturer of automatic test equipment and related software for the electronics and communications industries. The company has a striking earnings surprise history, beating estimates in all the trailing four quarters. It has an average positive surprise of 19.3%.
Headquartered in Santa Clara, CA, Applied Materials AMAT is engaged in developing, manufacturing and marketing semiconductor wafer fabrication equipment and related spare parts for the semiconductor industry. The company has an average positive surprise of 4.5% over the trailing four quarters.
Aegean Marine Petroleum Network Inc.ANW is a marine fuel logistics company, engaged in supplying and marketing refined marine fuel and lubricants to ships in port and at sea. The company has managed to beat earnings twice in the trailing four quarters, with an average positive surprise of 11.1%.
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.
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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