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After eight years of the market’s bull run, it will be naïve to assume that there are pockets of undervaluation waiting to be discovered. In such a scenario, the hunt for value stocks seems illogical. In fact, in such overvalued markets, investors should be outright cautious about where they are parking their money.
We believe betting on momentum stocks at the right time is one of the most reliable techniques to make quick bucks. In this screening article, we discuss the 52-week investment strategy, which loosely borrows from the basics of Momentum investing. One of the relatively new entries in the investing rulebook, the 52-week investment strategy, relies on the new investment mantra, “buy high and sell higher.”
A wide group of investors are placing their bets on stocks which are near their 52 week high mark but are still undervalued with strong upside potential.
Easier said than done, picking winners from the multitude of stocks near the 52-week high mark is no mean feat. Here, investors should bore in mind that this is a tricky strategy which might not yield the desired results without a foolproof plan. To ensure that you don’t chase fads blindly, rely on our screener which clubs 52-week high stocks with the right set of parameters for optimal returns.
A Peek in to 52-Week High Stocks
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 seven of the 14 stocks that made it through the screen:
Idaho-based Micron Technology, Inc. (MU – Free Report) is a provider of advanced semiconductor solutions. Through its worldwide operations, the company manufactures and markets Dynamic Random Access Memory, NAND flash memory, CMOS image sensors, other semiconductor components and memory modules used in leading-edge computing, consumer, networking and mobile products. With an earnings beat in all the last four quarters, the company has an average positive surprise of 23.5%.
Headquartered in Poway, CA, Cohu, Inc. (COHU – Free Report) is engaged in development, manufacturing, sale and servicing of semiconductor test and inspection handlers, micro-electro mechanical system test modules and thermal sub-systems. These are deployed by semiconductor manufacturers and test subcontractors. The company has a striking earnings surprise history with an average positive surprise of 117.9% over the trailing four quarters, beating estimates all through.
Louisiana-Pacific Corp. (LPX – Free Report) : The company, together with its subsidiaries, is engaged in manufacturing and selling building products that are used in new home construction, repair and remodeling, outdoor structures, light industrial and commercial construction. Louisiana-Pacifichas registered an impressive average positive earnings surprise of 66.3% in the last four quarters.
ZAGG Inc (ZAGG – Free Report) designs, manufactures, and distributes mobile tech accessories for smartphones and tablets. This company’s flagship brand, the invisibleSHIELD, is a protective, high-tech patented film covering, designed for iPods, laptops, cell phones, digital cameras, PDAs, watch faces, GPS systems, gaming devices and other items. The company has an average positive surprise of 52.1% for the trailing four quarters, beating estimates twice.
Coherent Inc. (COHR – Free Report) 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 11.9%.
Founded in 1969, DST Systems, Inc. (DST – Free Report) is one of the leading global providers of sophisticated information processing software and systems to the financial services industry, primarily mutual funds and investment managers. The company has an excellent earnings surprise history with an average positive surprise of 9.3%, beating estimates all through the trailing four quarters.
ACCO Brands Corporation (ACCO – Free Report) is a leading provider of branded office products. Headquartered in Lake Zurich, IL, the company designs, manufactures, sources, markets, and sells office products, academic supplies, and calendar products across the globe. The company has an average positive surprise of 24.7% for the trailing four quarters, registering back-to-back beats.
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.