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 Marathon Petroleum MPC, Absolute Software ABST, Sonoco SON and Clean Harbors CLH 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 20 stocks that made it through the screen:
Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products. Marathon’s $21 billion sale of its Speedway retail business provided the company with a much-needed cash infusion. The deal also comes with a 15-year fuel supply agreement, per which Marathon will supply 7.7 billion gallons of gasoline per year to 7-Eleven, thus ensuring a steady revenue stream. The company’s exposure to the more stable cash flows from the logistics segment diversifies the earnings stream and offers a buffer against the volatile refining business. Consequently, Marathon is primed for significant capital appreciation and is viewed as a preferred downstream operator to own now.
The company currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for Marathon Petroleum’s 2022 earnings has been revised upward by 0.1% to $21.11 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 56.68%.
Sonoco is a leading provider of consumer packaging, industrial products, protective packaging and packaging supply chain services. Strong recovery in price and cost across most of its businesses, robust end-market demand, the Ball Metalpack acquisition, productivity initiatives and improved volume/mix are likely to drive the company’s results in the near term.
Sonoco’s Consumer Packaging segment will continue to gain traction from the flexible packaging business and plastic food packaging. Its Industrial Paper Packaging segment will gain from strong demand for global tubes, cores and cones.
The company currently sports a Zacks Rank of 1 and has a VGM Score of C. The Zacks Consensus Estimate for Sonoco’s 2022 earnings has remained steady at $6.33 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 4.06%.
Absolute Software is engaged in the business of providing firmware-persistent endpoint security and management solutions. The company provides solutions for computer security monitoring and endpoint management industry.
Absolute Software is benefiting from the rising demand for cyber-security solutions owing to a slew of data breaches and a rise in demand for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud migration strategies adopted by organizations are key growth drivers. Synergies from last year’s NetMotion acquisition have enhanced its product portfolio, helping it gain new customers.
The company currently sports a Zacks Rank of 1. The Zacks Consensus Estimate for Absolute Software’s 2022 earnings has moved up by 487.5% to 47 cents per share in the past 30 days. The company missed the Zacks Consensus Estimate thrice in the trailing four quarters while surpassing the same on one occasion, the average negative surprise being 174.95%.
Clean Harbors is a leading provider of environmental, energy and industrial services in North America, wherein it operates the largest number of hazardous waste incinerators, landfills and treatment, and storage and disposal facilities. The company continues to make capital investments to enhance its quality and comply with government and local regulations. Acquisitions help the company expand its business across multiple lines of services. Consistent share repurchases boost investor confidence and positively impact the company’s earnings per share.
The company currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for Clean Harbors’ 2022 earnings has remained steady at $6.78 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 37.51%.
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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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Sonoco Products Company (SON) : Free Stock Analysis Report
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