Buy low, sell high. That mantra is tattooed in the minds of a majority of investors and is ingrained into the minds of anyone who follows the mainstream media or has taken any finance courses. This natural tendency to want to buy low and sell high causes many investors to view stocks reaching new 52-week or multi-year highs as overvalued stocks, and for the chance of additional upside to be limited. However, new highs aren't necessarily a signal that the stock is overvalued, sometimes the stock continues to make new highs and you end up kicking yourself for missing the run. Sometimes it might be better to buy high and sell higher in the future.
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But identifying whether the stock will fall sharply from the new high or continue higher is the difficult part. Value-oriented investors will often stay away from stocks that are hitting new highs because the stocks are usually accompanied with a relatively high price-to-earnings ratio. On the other hand, growth investors and speculators tend to be more inclined to invest at this point because of the potential for above average future growth. Therefore, one key to identifying whether the trend will persist is being able to predict the future growth prospects of the company, which is often not a small feat.
One strategy that may be easier to implement is simply a quantitative momentum-based strategy. A set of criteria that could be used to find candidates could be companies trading close to their 52-week high with a relatively low RSI. With that said, here are seven companies hitting new highs:
|Company||Ticker||New 52-Week High||
|Lucas Energy Inc.||LEI||2.50||
|Dollar Thrifty Automotive Group Inc.||DTG||50.91||
|Nalco Holding Co.||NLC||29.25||
|The J.M. Smucker Company||SJM||63.50||
|Kodiak Oil and Gas Corp.||KOG||4.34||
|Data as of May 3, 2010|
The J.M. Smucker Company
The majority of companies on this list trading near their new 52-week highs also have a high RSI. A high RSI (>70) is typically considered overbought while a low RSI (<30) is considered oversold. Ideally, you would like to buy a stock that has been oversold and which is also trading near its 52-week high. The only company on this list that would be a candidate for this strategy would be The J.M. Smucker Company. The company is trading within 5% of its 52-week high of 63.50, and its RSI is relatively low at about 40, although not under 30. An investor could wait for the RSI of J.M. Smucker to fall below 30 before initiating a position, or initiate the trade right now. It depends on your comfort and other indicators you may be using.
When a company hits a new 52-week high, it presents a unique opportunity for the trader. There are various approaches a trader can take to bet on the direction of the stock, this article offers one momentum-based approach. Traditional investors may be more comfortable with a fundamental approach. (For more stock analysis, take a look at Are GPS Devices Doomed?)
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