New Highs for the 'New Highs' Stock-Picking Strategy

With the market having made new all-time just last week, I thought I'd celebrate that record event by showcasing our 'New Highs' strategy, which is also making new highs! (YTD thru 11/10/17, it's up 78.7% vs. the S&P's 17.3%.)

This screen focuses on a powerful concept, and that's buying stocks making new highs.

If somebody were to ask you what your best stocks are, you would likely name the stocks moving up the most in your portfolio. Your worst stocks? The ones going lower, of course.

Simply put, the winners in your portfolio are the ones going up. Period.

If the stock is underperforming the market (or worse, going down), you'll quickly identify it as one of your worst holdings -- and you would be right to do so.

This being the case, it only makes sense that some of these will be making new highs along the way.

Don't Be Afraid of New Highs

I know some are reluctant to buy stocks making new 52-week highs. But there's no reason to be. I suppose some may feel like they've already missed it. Or that now it has more room to fall. But if a stock is making a new 52-week high, that's a 'good thing'. Just like a stock making a new 52-week low is a 'bad thing'.

And I'm pretty sure the person who dislikes buying stocks making new 52-week highs wouldn't be too upset if the stock he already owned, broke out to a new 52-week high. And why should he? As I've mentioned before, statistics have shown that stocks making new highs have a tendency of making even higher highs. These are the stocks we all dream about. Getting in and watching it go up.

Of course, the fundamentals need to be there. And you should keep a watchful eye on valuations. But if you were in a stock making new highs and cheering it on, it seems silly to be afraid of one doing the same just because you haven't bought it yet.

One question I like asking myself just to put things into perspective is: If I was in it, would I be excited and would I still want to be in it? If the answer is "yes" -- then I'll look for the best opportunity to get in. If the answer is "no, I would be looking to take profits" -- then I'll move on.

Embrace Stocks Making New Highs

This topic reminds me of a question someone asked me a while ago about a stock I was talking about that was at a new 52-week high. In fact, it was at a new 5-year high.

He said, "Aren't you worried about buying a stock at a 52-week high?" I said of course not. So it just made a new-52 week high. That's great news. Guess what -- last year it made a new 52-week high as well. And the year before that. And the year before that. Can you imagine all the money you'd be leaving on the table if you were afraid of being in stocks every time they made a new high?

Parameters

• Current Price/52-Week High greater than or equal to .80
Stocks that are either at a new 52-week high, or have just hit it and are still trading within 20% of it, or are climbing towards their 52-week high and are within a 20% striking distance.

• Percent Change in Price over 12 Weeks greater than 0
Even though we're looking for stocks trading near their highs, I want to make sure the price momentum over the last 3 months is positive.

• Percent Change in Price over 4 Weeks greater than 0
The same goes for the last month as well.

• Zacks Rank equal to 1
Only Zacks Strong Buys for this one.

• Price/Sales Ratio less than or equal to Industry Median
As mentioned before, the P/S ratio shows how much you're paying for every $1 of sales the company makes. For this screen, we're requiring the P/S ratio to be less than the median P/S for its Industry. Note: different industries will have different averages or medians for different items. A P/S of 1 is not such a great bargain if the median for its Industry is 0.7. But it's a great find if the Industry's median is 1.5. This parameter lets us focus in on 'discounted' valuations germane to their industry. And this allows these stocks to still be considered undervalued even as their stock price continues higher.

• P/E (using F1 Estimates) less than or equal to Industry Median
Just like the P/S ratio, we're looking for stocks whose P/E is below the median for their respective Industry. Including proven valuation metrics when using price momentum screens gives the trader a significant advantage.

• Projected One Year EPS Growth F(1)/F(0) greater than or equal to Industry Median
While the P/S and P/E ratios searched for stocks with valuations below their Industry's median. This item is looking for stocks with projected growth rates above the median for its Industry. In order for a stock to continue to go higher, there needs to be a reason for it to do so. And strong growth of course is an important part of that.

• Current Avg. 20-Day Volume greater than Previous Week's Avg. 20-Day Volume
This helps find stocks where the volume has increased in the recent week vs. the previous week. Once again, if the price is climbing on increased volume, that shows increased demand or buying coming in. And the more buying demand there is for a stock, the more it should climb.

• All of the above parameters are applied to stocks with a Price greater than or equal to $5 and an Average 20-Day Volume of greater than or equal to 100,000 shares.

• Percent Change in Price over 12 Weeks + Percent Change in Price over 4 Weeks equal to Top # 5
The screen is then narrowed down to produce no more than 5 stocks at a time. The way we're doing it with this item is by combining the percentage price change for both the 12-week and 4-week periods to select the top 5 stocks. Why? If the 12=-week % price change is solid, but the 4-week change is relatively weak, that might mean the stock is retreating from its high rather than advancing towards it. On the other hand, if the 12-week gain came largely from just the last 4 weeks-worth of gains; while that's impressive, it shows that the trend prior to the most recent period wasn't as robust. This item tries to find the best gainers on both time horizons in an effort to see that momentum carries forward.

The Results

Over the last 17 years, the New Highs strategy, using a one-week holding period, showed an average annual return of 52.5%. In 2016 it was up 95.5%. And so far in 2017 (YTD thru 11/10/17), it's up 78.7%.

What's interesting is that, even though this strategy is buying stocks near their highs, the risk/volatility (as defined by its maximum drawdown) was 23% less than the market while generating significantly better returns.

Further analysis of the backtest report shows that during bearish periods, there were fewer stocks (and sometimes no stocks) meeting the 52-week high requirement (let alone the Projected Growth Rate requirement) thus reducing the exposure of this strategy.

In bullish periods, as you would expect, there were more stocks coming through (up to our maximum of 5, of course), allowing for greater participation when the market was up.

Stocks

There are 5 new stocks coming thru this screen this week. Here are 3 of them:

KELYA Kelly Services
LRCX Lam Research
ZAGG ZAGG, Inc.

Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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