Investors generally consider a 52-week high as a good criterion to determine an entry or exit point for a given stock. However, stocks touching new 52-week highs are often predisposed to profit-taking, resulting in pullbacks and trend reversals.
Moreover, given the high price, investors often wonder if the stock is overpriced. While the speculations are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, investors might lose out on top gainers in an attempt to avoid the steep prices.
Stocks such as AMN Healthcare Services (NYSE:AMN), Otter Tail (NASDAQ:OTTR), Encore Capital Group (NASDAQ:ECPG) and Cboe Global Markets (BATS:CBOE) are expected to maintain the momentum and keep scaling new highs. More information on a stock is necessary to understand whether or not there is scope for further upside.
Here we discuss a strategy to find the right stocks. The technique borrows from the basics of momentum investing and bets on "buy high, sell higher."
52-Week High: A Good Indicator
Many a time, stocks hitting a 52-week high fail to scale higher despite having potential. This is because investors fear that the stocks are overvalued and expect the price to crash.
Overvaluation is natural for most of these stocks as investors' focus (or willingness to pay the premium) has helped them reach the level. But that does not always indicate an impending decline. Factors such as robust sales, surging profit levels, earnings growth prospects, and strategic acquisitions that encouraged 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 dominates 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 the 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
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 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 =1
No screening is complete without the Zacks Rank, which has proved its worth since its inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) have always managed to brave adversities and beat the market average.
Current Price >= 5
This parameter will help screen stocks that are trading at $5 or higher.
Volume – 20 days (shares) >= 100000
The inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.
Here are our four picks of the eight stocks that made it through the screen:
AMN Healthcare Services is a travel healthcare staffing company. It recruits and places nurses, physicians and other healthcare professionals in travel or permanent assignments at acute-care facilities, in physician practice groups as well as at other healthcare facilities. The recent Connetics USA buyout is expected to expand its International Staffing business. Strength in the healthcare Managed Services Program (NYSE:MSP) and a broad array of services augurs well.
The company currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for AMN Healthcare Services' 2022 earnings has been revised upward by 2.8% to $10.41 per share in the past 60 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 15.6%.
Otter Tail provides attractive investment opportunities in the utility space, given its two-platform business model that consists of electric and manufacturing units. The company, through its subsidiaries, is also engaged in other businesses, which are referred to as Health Services Operations and Diversified Operations. In order to secure more stable cashflows, Otter Tail is planning to invest in rate base growth opportunities. The company has plans to invest $978 million in the 2022-2026 time period in electric, manufacturing and plastics segments.
The company currently sports a Zacks Rank of 1 and has a VGM Score of C. The Zacks Consensus Estimate for Otter Tail's 2022 earnings has moved up by 37.7% to $5.37 per share in the past 60 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 36.95%.
Encore Capital Group is an international specialty finance company providing debt recovery solutions and other related services to consumers across a broad range of financial assets. The company primarily purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. The company also provides debt servicing and other portfolio management services to credit originators for non-performing loans.
The company currently carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate for Encore Capital Group's 2022 earnings has remained steady at $12.88 per share in the past 60 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 80.4%.
Cboe Global Markets is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. It eyes strategic acquisitions to gain a competitive edge by diversifying and adding capabilities to its portfolio, generating expense synergies and venturing into new markets. It projects inorganic net revenue growth to be 5% to 7% in 2022. CBOE Global is also exploring new markets like the Middle East, Scandinavia and Asia, while pursuing jurisdictional approval in more established markets, including Switzerland and Israel.
The company currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for Cboe Global Markets' 2022 earnings has moved up 0.6% to $6.33 per share in the past 60 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 4.58%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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 Research Wizard trial 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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