A 52-week high generally serves as an indicator for investors as stocks near that level are perceived to be winners.

No matter how disciplined and systematic investors are, the equity market volatility always manages to affect some in the end. Only a few lucky ones have a smooth sail while others fall victim to ad hoc strategies.

More often than not, investors wonder if a high price range has made the stock overpriced. While the apprehensions are not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.

In fact, an investor might miss out on top gainers in an attempt to avoid the steep prices of stocks that are near their 52-week high mark.

However, a stock can maintain the momentum and keep scaling higher with time. So, one should take a more informed approach to understand if any further upside is left.

A particular strategy advises investors to gamble on stocks that have scaled 52-week high. This is a fairly new approach in the investing rulebook. Borrowing from the basics of Momentum investing, this technique bets on the principle of buying high and selling higher.

Though skeptics may question this 52-week high investment strategy, we believe that it, when clubbed with the right set of parameters, will help rake in sizable gains. A wide group of investors today favor stocks with prospects of scaling higher. These investors have mastered the art of finding stocks that have strong upside potential and are still undervalued.

Here we discuss a strategy to find the right stocks.

Borrowing from the basics of momentum investing, this technique 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 potential. This is because investors fear that the stocks are overvalued and a price crash is impending.

In fact, overvaluation is quite natural for most of these stocks as investors’ focus (or willingness to pay premium) has helped them reach the level. But that does not always mean 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 and sales, ensuring continuation of the 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 rate than the industry. This is a meaningful indicator, as decent earnings growth adds to investor optimism.

Zacks Rank <=2

No screening is complete without our proven Zacks Rank, which has proved its worth since its inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat the market. 

Current Price >= 5

This parameter will help screen stocks that are trading at $5 or higher.

Volume – 20 days (shares) >= 100000

Inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.

Here are five of the 28 stocks that made it through the screen:

Verint Systems Inc. (VRNT - Free Report) is a leading provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. Currently sporting a Zacks Rank #1, the company delivered average positive surprise of 13.32% in the last four quarters.

Domiciled in Arlington, VA, CACI International (CACI - Free Report) is a provider of IT applications and infrastructure. The company’s solutions enhance defense and intelligence capabilities, assure homeland security, improve decision making and help customers operate smartly and efficiently. The company currently carries a Zacks Rank #1 and came up with average beat of 28.98% in the last four quarters.

Xilinx, Inc. (XLNX - Free Report) is a San Jose, CA-based company, which designs and manufactures a broad range of high-performance, high-density programmable logic devices, such as field-programmable gate arrays and complex programmable logic devices. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 5.65% in the last four quarters.

Tech Data Corporation (TECD - Free Report) is a Clearwater, FL-based wholesale distributor of information technology products, logistics management, and other value-added services. The company distributes and markets more than 150,000 products from above 600 manufacturers and publishers. The company pulled off average four-quarter positive earnings surprise of 16.78% and has a Zacks Rank #2.

AMETEK, Inc. (AME - Free Report) located in Berwyn, PA, is one of the leading manufacturers of electronic appliances and electromechanical devices. AMETEK sells its products globally via a couple of operating groups, namely the Electronic Instruments Group and the Electromechanical Group. The company has average four-quarter positive surprise of 5.56% and is a Zacks #2 Ranked player.