Trading like a pro requires a dependable investment strategy that can help you rake in some good money. Some of the sliest tricks of successful investing are hidden in plain sight which are often disregarded.

One such tried and tested technique is picking stocks nearing their 52-week highs, as it seldom disappoints when clubbed with the right set of parameters. 

Why 52-Week High is a Good Indicator

At the core of the 52-week high investment strategy lies the much debatable “adjustment and anchoring bias.” Stemming from a psychological stance, this phenomenon asserts that investors generally use the 52-week high price as a reference point and value stocks against this anchor. They shy away from buying stocks if they are near their 52-week highs even if there is positive information. Investors think that these stocks may under react to any news and thus lose their sheen.

This opens up the other side of the argument that such under reaction leaves these stocks somewhat undervalued, particularly in the context of their growth drivers. Investors are jolted awake by encouraging news from these stocks and rush in to take positions. The renewed confidence propels prices even higher. As a result, these stocks begin to soar beyond their 52-week highs, eventually attaining higher price levels. There may be a broad set of factors including impressive sales, robust profitability and bullish earnings prospects driving the stocks up. Recent major developments may also send these stocks soaring.

Another theory put forward by market watchers and experts is that the price level of these stocks reflects their momentum more transparently than past changes in prices. It means if a stock is trading close to its 52-week high, chances are that it will perform better in subsequent periods. So investing in stocks near their 52-week high is akin to following the momentum strategy, which is based on the understanding that once a trend is established it is most likely to continue.

However, betting on these high-flying stocks without a clear investment blueprint may be risky. There is no denying the fact that these stocks are trading near their 52-week highs and bear the risk of falling fast as the market might consider them overvalued.

And for that very reason we’ve added a few other parameters to devise a foolproof strategy.

We will screen for stocks which are close to their 52-week highs, but still have strong growth prospects relative to their respective industries. In addition, we’ve made sure these stocks are relatively undervalued compared to their peers, in terms of earnings as well as sales.
With positive momentum in the stock price, blended with strong earnings growth expectations and great value metrics, we believe these stocks will continue their uptrend for quite some time to come.

A Safe and Sound Strategy

Current Price/52 Week High >= .80

(This simply measures the ratio between current price to 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 only within 20% of its 52-week high range and is likely to touch the 52-week threshold soon.)

% Change Price – 4 Weeks > 0

(It ensures that the price of the stock has moved north over the past four weeks.)

% Change Price – 12 Weeks > 0

(This metric ensures that the stock has continued its upward price momentum over the past three months we well.)

Price/Sales <= XIndMed

(Lower the ratio, the higher is the benefit for investors as they have to pay a smaller price for the same amount of sales generated by the company.)

P/E using F(1) Estimate <= XIndMed

(This metric measures the amount that an investor will invest in a company to obtain one dollar of that company’s earnings.)

One-Year EPS Growth F(1)/F(0) >= XIndMed

(This metric will help in zeroing in on stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always 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 beat adversities and outperformed the market.)

Current Price >= 5

This parameter will help in screening stocks which are trading at a minimum price of $5.

Volume – 20 days (shares) >= 100000

Inclusion of this metric ensures that there are substantial volume of shares that can be traded easily.

Here are five of the nine stocks that made it through the screen:

Fresh Del Monte Produce Inc.(FDP Quick QuoteFDP - Free Report) : This company and its subsidiaries are engaged in the production, marketing and distribution of fresh and fresh-cut fruit and vegetables across the globe.

Ryerson Holding Corporation(RYI Quick QuoteRYI - Free Report) : This company along with its subsidiaries is engaged in the processing and distribution of metals like stainless steel, aluminum, carbon steel, and alloy steels, as well as nickel and red metals. The stock has an impressive four-quarter trailing surprise of 118.19%.

Spark Energy, Inc.: This retail energy services company is engaged in the distribution of natural gas and electricity to residential, commercial, and industrial customers. The company has a stellar four-quarter trailing surprise of 780.42%.

OMNOVA Solutions Inc.: The company offers emulsion polymers, specialty chemicals, and engineered surfaces for clients in commercial, industrial, and residential domains across North America, Europe, and Asia. The company has a decent four-quarter trailing surprise of 78.57%.

Nippon Telegraph and Telephone Corporation: The company, together with its subsidiaries, offers fixed and mobile voice related services, IP/packet communications services, telecommunication equipment and other telecommunications-related services to clients across the globe.

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 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.

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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