Most investors are familiar with the adage “buy low and sell high.” Like so many of the great sayings in life, this one sounds great but is pretty hard to pull off. Often one “buys low” only to see the stock go lower. The wise advice doesn’t cover that one!
On the other hand, there are investors who buy only stocks that are going up. Some might call this “buy high and sell higher.” While I think that this is a strategy that can work, it is also one that potentially adds a lot of risk to one’s portfolio if not executed properly. Like the old game of hot potato, you lose if you get stuck with a high-flyer that quits flying. In other words, buying the “52-week high list” does not guarantee you will come out ahead.
I believe that one can benefit in buying stocks trading at new highs by checking the technicals, the fundamentals and the valuation. On technicals, one wants to make sure that the deviation from trends isn’t so extreme. There are lots of different tools one could use, like price momentum indicators or oscillators. No one technique will ever give a definitive answer, but a technical assessment may help prevent a poorly timed purchase.
Like technicals, fundamental strength is subject to interpretation. I like to look at earnings and sales growth, both historical as well as predicted (analyst consensus). There are more complex indicators as well, like growth in free cash flow or growth in book value. In any event, the future progress of a stock tends to depend on future earnings, so checking for fundamental trends can make sense.
Valuation is tougher, as often a stock can appear expensive but later prove to have been reasonably priced had the future earnings actually been known. Still, one needs to assess the valuation, as stocks trading at 52-week highs may have overshot. I don’t expect a stock trading at a new high to be especially cheap. Instead, I try to make sure it’s not too expensive, which is more of an art than a science.
So, keeping these checks in minds, I decided to screen all stocks trading at or near their 52-week high, using Baseline. Here are the exact parameters I used:
· Market Cap: > $500mm
· Price > 96% of 52-Week High
· Price < 150% of 52-Week Low
· 1-year price return <50%
· 5-Year Compound EPS Growth > 7%
· Earnings growth (past 4 quarters): > 12%
· 2012 Projected EPS Growth > 10%
· 2013 Projected EPS Growth > 12%
All of the stocks are within 4% of their 52-week high, but they are up no more than 50% from their 52-week low, a technical check. Another check is that the stocks are limited to a 50% increase over the past year, about double the S&P 500. Fundamentally, all of these stocks have grown earnings by 7% or more over the past five years, so equal to or greater than the earnings growth of the S&P 500. More recently, they are expected to generate earnings in excess of 10% in 2012 and 12% in 2013. Also, earnings estimates are stable. I didn’t screen for valuation, but I include it in the results.
Here is what we get:
The exercise left us with 8 stocks to examine, and, fortunately, they come from four different economic sectors and a variety of market caps that range from about $1 billion to as high as $228 billion. While some are well known, a few are probably less so.
The market is up about 14% so far in 2012, and three of these stocks (shaded in green) have lagged, while the other five within 15% of the index. As far as valuation, I have highlighted three stocks that have a below-market valuation. I also shaded the two stocks that have more cash than debt.
I sorted the stocks in order of declining PE, from high to low. Stericycle (SRCL) is the most expensive, though I would point out that this one often trades expensively, perhaps due to its strong position as the market leader in medical waste recycling. Additionally, with a lot of recurring revenue, this is a company that has grown steadily and at a reasonably high rate (18% over the past five years). The current valuation is somewhat middle-of-the-road for the stock over the past decade.
Investors Bancorp (ISBC) is based in Short Hills, NJ and has deposits of about $8 billion. For a bank, it trades somewhat expensively, but this is about as low a PE since its IPO in late 2005. It seems like the best metric for this stock is actually price to tangible book. At 2X, it is at the high-end of where it has traded since early 2007. It hasn’t ever paid a dividend, which is somewhat unusual for a bank. One thing that I like is the 4.5% insider ownership. If you are looking into this one, you should be aware that there is a mutual holding company that owns a little over ½ the stock.
Cheesecake Factory (CAKE) was one of the four restaurants I profiled earlier this year as attractive. The price has increased modestly, but it is still below the all-time high set in 2006. At 17PE, the stock trades at half the 34PE that it got in 2004 and then again in early 2006.
V.F. (VFC), the clothing company that owns brands like North Face, Vans and Timberland (acquired in 2011), has a business model that I like, combining brands and, to a lesser degree, operating its own stores. It can be challenging to balance potential conflicts with customers (stores), who are also competitors, but VFC has excelled. The 15PE is about as high as the company has ever traded, but it seems reasonable in the context of its growth potential.
You may recall that I called Google (GOOG) out as a possible buy opportunity in early December, describing it as an undervalued high-quality growth stock. The stock has rallied from 625 to 700 or so, but it is still below the all-time high set in late 2007 near 747. I must caution that the pending stock split, in which shareholders will receive a new class of stock, could lead to some volatility and seems like a bad idea to me.
The DirecTV Group (DTV) has flat-lined for the past year while producing record earnings and leading to a very low valuation on the surface. I don’t follow this one very closely, though I am familiar with its U.S. business, which is the vast majority of its sales and earnings. It also operates digital satellite television in Latin America and three regional sports television networks.
Viacom B (VIAB) is a leading provider of Media Networks (MTC, Nickelodeon, Comedy Central), which is about 60% of sales, and Filmed Entertainment. Again, the stock appears to have a fairly low valuation, and its Board of Directors sees it that way as well, as it has repurchased stock aggressively. The company also began paying a dividend (2.2% yield) in 2010 and has already boosted it twice.
Finally, World Acceptance (WRLD) is based in South Carolina and offers installment loans to consumers through its 1100 offices in several states and Mexico. They are filling a void created by reduced lending by banks. They also operate a buying club and a tax preparation service. Compared to other financial institutions, the leverage, as defined by total assets compared to equity, is quite low at 2X. The company pays no dividend.
So, hopefully I have given you a few ideas to ponder. Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: No positions in any stock mentioned
At the time of publication and in the preceding month, TradeKing and the third-party content provider did not have ownership greater than 1% in any stocks mentioned here and do not have any other actual, material conflict of interest known at the time of publication. Neither TradeKing nor the third-party content provider, received compensation from a public offering or from investment banking services related to any companies mentioned here within the past 12 months, or expects to receive any in the next 3 months. Neither TradeKing nor the third party content provider engaged in market making in the securities mentioned here. TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders. TradeKing All-Stars provide timely market commentary via the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator's bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.
Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Alan Brochstein maintains a business relationship with TradeKing.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.
© 2012 TradeKing Group, Inc. Securities offered through TradeKing, LLC. All rights reserved.