The year 2016 will likely be remembered as one of the most eventful ones. An unexpected regime change, a long overdue interest rate hike and one of the fastest economic growth in recent times have surely made a mark. With President-elect Donald Trump taking office in 2017, the year is slated to be one wild roller coaster ride that can reward some and punish others.
Meanwhile, the growing presence of high-valued stocks has made the market overvalued. In such a scenario, it may be naïve to invest in value stocks. Also, the prolonged slowdown in the global economy restricts the chances of further growth in the near term.
At this point, it would be prudent to stack up on great momentum stocks. One such trend is spotting stocks that are at or above the 52-week high mark. The 52-week investment strategy is one of the relatively new entries in the investing rulebook. Borrowing from the basics of Momentum investing, this technique bets on the principle of buying high and selling higher.
A wide group of investors today favor winning stocks with prospects of scaling higher. These investors have mastered the art of finding stocks that have strong upside potential and are still undervalued. Clubbing 52-week high stocks with the correct set of parameters is all you need to turn the tide in your favor.
How Does it Work?
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.
Meanwhile, market gurus believe that the current price level rather than past changes in prices better reflect a stock’s momentum. This implies that if a stock is trading close to its 52-week high range, chances are that it will perform better in the subsequent period.
The Parameters to Rely on
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
Lower the ratio, 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 metric 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 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.
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 19 stocks that made it through the screen:
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%.
Headquartered in Santa Clara, CA, Applied Materials AMAT is engaged in developing, manufacturing and marketing of semiconductor wafer fabrication equipment and related spare parts for the semiconductor industry. The company has an average positive surprise of 4.5% for 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.
Cambrex Corporation CBM 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 beats in the trailing four quarters, the company has an average positive surprise of 19.8%.
Kimball Electronics Inc. KE operates as a contract manufacturer of durable goods electronics. The company specializes in durable electronics for the medical, automotive, industrial and public safety markets. The company has a positive average surprise of 11.9% for the trailing four quarters, having beaten estimates twice.
Tailored Brands, Inc. TLRD is a specialty retailer of men's suits and provider of tuxedo rental product primarily in the U.S. and Canada. It provides suit separates, port coats, slacks, sportswear, outerwear, dress shirts, shoes and accessories. With three earnings beats over the trailing four quarters, the company has an average positive surprise of 8.4%.
Liberty Media Corporation LMCA is engaged in media, communications and entertainment businesses through its subsidiaries and investments in publicly-traded companies. Liberty Media is based in Englewood, CO. The company has a whopping average positive surprise of 72.1% over the trailing four quarters, having beaten estimates twice.
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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CAMBREX CORP (CBM): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
APPLD MATLS INC (AMAT): Free Stock Analysis Report
COHERENT INC (COHR): Free Stock Analysis Report
LIBERTY MEDIA-A (LMCA): Free Stock Analysis Report
TAILORED BRANDS (TLRD): Free Stock Analysis Report
KIMBALL ELECTRN (KE): Free Stock Analysis Report
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