Don't Shrink From Our High Fliers

6/22/2015


When stocks near fresh highs, some investors succumb to altitude sickness.

Many view a new high as a sell signal — or a reason to avoid buying a stock in the first place. However, we consider this approach a behavioral bias, with investors becoming anchored to old information that colors their interpretation of new data. Stocks near historical highs may actually be undervalued if enough investors fail to fully incorporate recent developments because they fixate on past prices.

Academic studies have found that the 52-week high acts as a psychological barrier that can cause investors to behave irrationally. A study by Thomas George and Chuan-Yang Hwang called "The 52-Week High and Momentum Investing," published in the October 2004 issue of The Journal of Finance, looked at rolling six-month returns from 1963 to 2001 for a portfolio that took a long position in stocks closest to their 52-week highs and shorted stocks farthest from their 52-week highs. This strategy proved far more effective than other momentum strategies, and the researchers concluded that stocks near 52-week highs tend to initially underreact to positive news because investors are reluctant to push prices above that barrier. Eventually, the good news prevails and the stocks move to fresh highs.

With stocks trading near 52-week lows, investors tend to underreact when bad news hits, though the stocks later drift downward. Stocks trading in the middle of the 52-week high-low range tend to react more quickly and exhibit less post-news drift.

When reviewing a stock near its 52-week high, we also consider its valuation relative to earnings and other metrics, as well as the trend in analyst profit estimates. Not surprisingly, reasonable values and rising profit estimates are scarce among the S&P 1500 Index's high fliers. Consider that 303 stocks in the S&P 1500 Index trade within 3% of their 52-week highs, as shown in the table below. But less than half of those stocks earn above-average Value scores in our Quadrix stock-rating system. And just 80 stocks have also seen their per-share-profit estimates for the current fiscal year rise over the past 90 days.

FINDING VALUE IN TOP PERFORMERS
In the S&P 1500 Index, 303 stocks trade within 3% of their 52-week highs. Valuations look stretched for most of those stocks, considering just 144 also score above 50 in Quadrix for Value — and just 80 of those stocks with decent valuations have also seen their consensus profit estimates for the current fiscal year rise over the past 90 days. Our high-flying recommended stocks (see the table on page 2) look comparatively better on both measures.
------- Number Of Stocks (% Of Index Or % Of Recommended Stocks) -------
Trading Range
Stocks In
Range
And Quadrix
Value
Above 50
And Value
Above 80
And Value
Above 50
& EPS Est.
Rising
And Value
Above 80
& EPS Est.
Rising
S&P 1500 Index
3% of 52-week high
303
(20)
144
23
80
15
5% of 52-week high
450
(30)
224
40
118
25
10% of 52-week high
755
(50)
377
74
194
44
Forecasts recommended stocks
3% of 52-week high
12
(35)
11
6
6
4
5% of 52-week high
17
(50)
15
6
9
4
10% of 52-week high
27
(79)
24
8
14
4
Note: Quadrix scores are percentile ranks, with 100 the best.

Based on this criteria, our stocks fare far better than the market. We recommend 12 stocks within 3% of their 52-week highs. All but one one of these stocks scores above 50 for Value, with six also enjoying profit-estimate momentum.

The table below, lists recommended stocks trading less than 10% off their 52-week highs that also score above 50 for Value and enjoy favorable revision trends. For each of these stocks, their 52-week highs are also all-time highs. With the exception of F5 Networks ($126; FFIV), Lam Research ($82; LRCX), and Shire ($246; SHPG), all of these record highs have occurred since April 15. Aetna ($124; AET), Gilead Sciences ($119; GILD), HCA Holdings ($84; HCA), and J.P. Morgan Chase ($68; JPM) set their highs earlier this month.

FORECASTS' HIGH FLIERS
The following recommended stocks trade within 10% of their 52-week highs, while earning Value scores above 50 and enjoying favorable revision trends for per-share-profit estimates for the current fiscal year.
------ Total Returns ------
Est. EPS, Curr. Fiscal Year
------------ Quadrix Scores ------------
Company (Price; Ticker)
52-Week
Range
($)
% Below
52-Week
High
1
Month
(%)
YTD
(%)
1
Year
(%)
Year-
Over-
Year
Growth
(%)
Current
Estimate
($)
Estimate
90 Days
Ago
($)
Value
Earns.
Ests.
Perfor-
mance
Overall
Aetna ($124; AET)
129
-
72
4
8.9
39.4
55.4
10
7.38
7.17
63
87
91
83
Apple ($127; AAPL)
135
-
90
5
(2.2)
15.3
40.5
40
9.03
8.61
76
95
76
99
CBRE ($37; CBG)
40
-
27
8
(5.2)
7.2
20.5
18
1.98
1.94
58
96
63
93
CDW ($37; CDW)
39
-
28
7
(2.1)
4.3
20.3
15
2.74
2.71
71
88
61
92
Comcast
($60; CMCSa)
60
-
49
1
5.4
2.8
16.7
13
3.32
3.23
82
89
46
97
F5 Networks
($126; FFIV)
136
-
107
7
(0.7)
(3.1)
11.6
19
6.44
6.35
60
57
57
92
Foot Locker
($63; FL)
66
-
47
4
0.6
12.5
28.9
12
4.00
3.92
72
95
65
96
Gilead Sciences
($119; GILD)
120
-
79
1
7.5
26.1
47.7
33
10.78
9.53
89
48
82
100
HCA Holdings
($84; HCA)
85
-
54
0
3.9
14.6
50.2
11
5.23
4.96
77
96
84
96
J.P. Morgan Chase
($68; JPM)
69
-
54
1
2.6
8.9
23.1
11
5.87
5.80
83
55
79
88
Jones Lang LaSalle
($170; JLL)
175
-
119
3
(0.7)
13.6
40.4
9
9.48
9.05
60
84
76
93
Lam Research
($82; LRCX)
86
-
66
4
3.9
3.7
25.0
13
4.99
4.77
64
94
66
96
Lear ($116; LEA)
118
-
75
2
0.2
18.0
30.2
18
9.63
9.53
91
77
79
99
Shire ($246; SHPG)
265
-
156
7
(3.5)
15.6
29.0
7
11.37
11.31
52
61
70
92
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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