A stock hitting its 52-week high level is thought to be a winner. This level works as an indicator for many investors for buying or selling a stock.

Investors often wonder if this level makes the stock an overpriced one. While they are not totally incorrect, all stocks hitting a 52-week high are not necessarily overpriced.

In fact, a decision to avoid stocks that are trading near their 52-week high levels makes an investor miss many of the top gainers.

A stock can continue the momentum and keep touching new highs as time progresses. So, one should take a more informed approach to understand if it has any further upside left.

Here we will discuss a strategy to find the right stocks:

Borrowing from the basics of momentum investing, this technique bets on the catchphrase, “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 doesn’t 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 dominate 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.