A few tricks and tips can help investors compound their portfolio returns. However, devising the right strategy from the extensive pool of information might prove to be quite a daunting task for seasoned investors, let alone new entrants in the world of stock trading.

In this screen we discuss one of the oldest investment techniques, betting on stocks near 52-week highs. It is one of the most controversial strategies, with one set of experts cautioning investors against it and the other promoting it as an easy way of making quick bucks.

Meanwhile, a wide group of investors today favor winning stocks with prospects of scaling higher. These investors have mastered the art of finding stocks that have strong upside potential and are still undervalued. This screen helps you eliminate the risks associated with an ad-hoc 52-week high investment by clubbing it with a set of parameters.

An Insight into 52-Week High Stocks

Stocks near 52-week highs often instill the presumptive “adjustment and anchoring bias” principle 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 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.

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 has 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 metric 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. 

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 five of the 12 stocks that made it through the screen:

Winnebago Industries, Inc. (WGO - Analyst Report) is a leading manufacturer of recreational vehicles in the U.S. The company distributes its products through independent dealers throughout the U.S. and Canada. The company beat estimates twice in the trailing four quarters, the average positive surprise being 1.2%.

Idaho-based Micron Technology, Inc.(MU - Analyst 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 four quarters, the company has an average positive surprise of 31.5%.

Founded in 1983 and headquartered in Chicago, IL, Navigant Consulting Inc. (NCI - Analyst Report) is a provider of specialized consulting services. It serves industries undergoing regulatory and structural changes, including construction, energy, financial services and healthcare. The company managed to surpass estimates in all of the trailing four quarters, clocking an average positive surprise of 29.3%.

Nationstar Mortgage Holdings, Inc. (NSM - Snapshot Report) is a mortgage lender. It mainly originates conventional agency and government residential mortgage loans. The company also offers complementary services for mortgage investors. Nationstar Mortgage managed to beat estimates twice in the trailing four quarters, resulting in an average positive surprise of 10.2%.

Incorporated in 1959, Houston, TX-based McDermott International Inc. (MDR -Analyst Report) is an engineering and construction company, solely focused on the offshore oil and gas business. The company has a whopping average earnings surprise of 474%, beating estimates in all of the trailing four quarters.