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.

IN PICTURES: 8 Tips For Starting Your Own Business

Difficult Deciphering
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.

The Strategy
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

52-Week Low

RSI
Lucas Energy Inc. LEI 2.50

0.44

86
Dollar Thrifty Automotive Group Inc. DTG 50.91

3.66

84
Nalco Holding Co. NLC 29.25

15.19

54
The J.M. Smucker Company SJM

63.50

39.24

40
SAVVIS Inc. SVVS 20.63

9.50

60
Entegris, Inc. ENTG 6.83

1.68

62
Kodiak Oil and Gas Corp. KOG 4.34

0.66

65
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.

Bottom Line
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?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of &quot;limited,&quot; Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word &quot;berhad,&quot; ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!