Of late, it has become difficult to ignore the amount of information surfacing about the market being overvalued. Currently, every corner is now filled with richly valued stocks, making it more overvalued than any other bull market peak in the past century. Skeptics would fear that euphoric investors may be too busy ignoring the writings on the wall.
The question that looms large: “Has all the easy money been made?”
The answer to this question may be a bit more tricky than anticipated. Amid this environment, it may be a little naïve to put your money on the value stocks and expect them to scoop up aggressively. Also, the prolonged slowdown of the global economy restricts chances of any further growth spurt in the near term.
On the other hand, momentum strategy, along with positive market trends is proving to be one of the best ingredients to beat the market. One such trend is the 52-week high. 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 buy high and sell higher.
Market watchers believe that the current price levels reflect a stock’s momentum better than the past changes. This implies that if a stock is trading close to its 52-week high, chances are that it will perform better in subsequent periods.
Decoding 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 a robust potential, due to the psychological bias of investors, who fear that the stocks are overvalued and a price crash is impending. Some stocks remain undervalued due to prolonged under-reaction on part of investors, despite the presence of 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.
Beware! Blind Bets Can Be Dangerous
Betting on a stock near its 52-week high has its own share of risks as there is a fair chance of the stock either scaling higher or going downhill without any warning. At best, 52-week investments can be described as a touch-and-go strategy, which can definitely lead to handsome rewards, but only in conjunction with a particular set of parameters.
The main trick is to master the art of finding stocks that have a strong upside potential and are still undervalued. Going by the number of investors using this strategy, it is hard to tell since when Wall Street’s one-time reliable buzzword “buy low and sell high” has given way to the new investment mantra “buy high and sell higher.” A sizable section of investors, today, favor betting on winning stocks, with the belief that they can still surge higher.
Here at Zacks, we will help you hitch a quick ride on the 52-week high bandwagon to earn some profits. Combining 52-week high stocks with the correct set of parameters is all you need to turn the tide in your favor. We have considered the ratio between the stock’s current Price and its 52-Week High. A value of greater than 95% has been considered for screening, which implies that the stock is trading within 5% of its 52-week high level and is likely to touch the mark soon.
We have further singled out the undervalued stocks by using the P/E ratio. This metric measures the amount that an investor puts into a company to obtain one dollar of earnings. A P/E value of less than 20 has been picked for selecting the stocks. Moreover, the search has been refined by deploying the Zacks Momentum Style Score, which indicates the favorable time to pick a stock to take advantage of the momentum with the highest probability of success.
Our research shows that stocks with a Momentum Style Score of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best upside potential with a stronger momentum effect. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
4 Stocks to Scale Higher
Based in Singapore, Broadcom Ltd (AVGO) is the premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. This Zacks Rank #2 stock has a Momentum score of ‘A.’
- Current Price/52 Week High of 100.0%
- P/E (F1) ratio of 15.0x
HomeStreet Inc (HMST) is a diversified financial services company. The company is engaged in real estate lending, including mortgage banking activities and retail and business banking operations and serves consumers and businesses in the Pacific Northwest and Hawaii. This Zacks Rank #2 company sports a Momentum score of A.
- Current Price/52 Week High of 97.9%
- P/E (F1) ratio of 11.4x
Cherry Hill Mortgage Investment Corp (CHMI) is a residential real estate finance company that acquires, invests in and manages residential mortgage assets in the U.S. With a momentum score of A, the company also carries a Zacks Rank #2.
- Current Price/52 Week High of 96.1%
- P/E (F1) ratio of 8.9x
BHP Billiton plc (ADR) (BBL) is engaged in production of minerals, which includes iron ore, metallurgical coal, copper and uranium, as well as oil, gas and energy coal. BHP Billiton Plc is based in Collins Street, Melbourne Victoria.
- Current Price/52 Week High of 95.2%
- P/E (F1) ratio of 14.7x
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