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

Notably, investors often wonder if the stock is overpriced considering the high price. 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.

A stock can maintain the momentum and keep scaling new highs. So, one should take a more informed approach to understand if further upside is left.

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 having 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 a 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 as well as sales, ensuring 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 <=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 brave adversities and 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 44 stocks that made it through the screen:

Medtronic Public Limited Company (MDT - Free Report), headquartered in Dublin, Ireland, is among the world's largest medical technology, services, and solutions companies. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 5.83% in the last four quarters.

Based in California, Symantec Corporation (SYMC - Free Report) is known for some of the popular brands in security and utilities, including Norton Anti-Virus, Norton Internet Security and Norton System Works. It offers a wide range of application and software products for firewall, virtual private network, virus protection, vulnerability management, intrusion detection, and security services. Currently carrying a Zacks Rank #2, the company pulled off average positive surprise of 18.62% in the last four quarters.

Minneapolis, MN-based Target Corporation (TGT - Free Report) operates as a general merchandise retailer in the United States. The company provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women, and kids. The Zacks #2 Ranked player delivered average beat of 4.56% in the previous four quarters.

Popular, Inc. (BPOP - Free Report) is a Hato Rey, Puerto Rico-based publicly owned bank holding company, which provides its products and services primarily to institutional and retail customers. The company came up with average four-quarter positive earnings surprise of 6.84% and carries a Zacks Rank #2.

Headquartered in Deerfield, IL, Baxter International Inc. (BAX - Free Report) is a global medical technology company. Following the spinoff of its biopharmaceuticals segment, the company provides items such as kidney-dialysis equipment, infusion pumps, and intravenous solutions. Currently carrying a Zacks Rank #2, the company delivered average positive surprise of 9.15% in the last four quarters.