Investors generally consider a stock's 52-week high a good criterion for an entry or exit point. However, stocks touching new 52-week highs are often predisposed to profit-taking, resulting in pullbacks and trend reversals.
Moreover, given the high price, investors often wonder if the stock is overpriced. While the speculation is not absolutely baseless, all stocks hitting a 52-week high are not necessarily overpriced.
In fact, investors might lose out on top gainers in an attempt to avoid the steep prices.
Stocks such as Plains All American Pipeline PAA, National Fuel Gas Company NFG, Sunoco SUN and SM Energy SM are expected to maintain their momentum and keep scaling new highs. More information on a stock is necessary to understand whether or not there is scope for further upside.
Here, we discuss a strategy to find the right stocks. The technique borrows from the basics of momentum investing and bets on “buy high, sell higher.”
Many times, stocks that hit a 52-week high fail to scale higher despite having potential. This is because investors fear that the stocks are overvalued and expect the price to crash.
Overvaluation is natural for most of these stocks as investors’ focus (or willingness to pay the premium) has helped them reach the level. But that does not always indicate an impending decline. Factors such as robust sales, surging profit levels, earnings growth prospects and strategic acquisitions that encouraged investors to bet on these stocks could keep them motivated if there is no tangible negative. In other words, the momentum might continue.
Also, when a string of positive developments dominates the market, investors find their under-reaction unwarranted, even if there are no company-specific driving forces.
We ran a screen to zero in on 52-week high stocks (trading near the high level) that hold tremendous upside potential. The screen includes parameters to shortlist stocks with strong earnings growth expectations, sturdy value metrics and price momentum.
Moreover, the screen filters stocks that are relatively undervalued compared to their peers in terms of earnings as well as sales, ensuring the continuation of their rally for some time.
This is the ratio between the current price and the highest price at which the stock has traded in the past 52 weeks. A value greater than 0.8 implies the stock is trading within 20% of its 52-week high range.
It ensures that the stock price has moved north over the past four weeks.
This metric guarantees a continued upward price momentum for the stock over the past three months as well.
The lower, the better.
This metric measures the amount an investor puts into a company to obtain one dollar of earnings. It narrows down the list of stocks to those that are undervalued compared to the industry.
This helps choose stocks that have higher growth rates than the industry. This is a meaningful indicator, as decent earnings growth adds to investor optimism.
No screening is complete without the Zacks Rank, which has proved its worth since its inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) have always managed to brave adversities and beat the market average. You can see the complete list of today’s Zacks #1 Rank stocks here.
This parameter will help screen stocks that are trading at $5 or higher.
The inclusion of this metric ensures that there is a substantial volume of shares, so trading is easier.
Here are our four picks out of the nine stocks that made it through the screen:
Plains All American Pipeline, a master limited partnership (MLP), is involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids (NGL) and refined products in the United States and Canada.
The company’s widespread Permian Basin operations should allow it to capture the increasing Permian production volumes. The firm's cost-saving initiatives, JV and asset divestitures are expected to boost operations. Its expansion of existing pipelines and the development of new pipeline projects in key production regions of the United States should drive its operations. The firm has enough liquidity to meet its near-term debt obligations.
The Zacks Consensus Estimate for 2025 earnings has remained unchanged at $1.39 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters while missing once, the average surprise being 7.24%. PAA has gained 22.9% in the past year.
National Fuel Gas Company is an integrated energy company, which has natural gas assets located in the prolific Appalachian basin and oil-producing assets in California. The company operates through the following segments, namely Exploration and Production and Other, Pipeline and Storage and Gathering, and Utility and Energy Marketing.
National Fuel Gas' systematic investments should strengthen its operations and reduce greenhouse gas emissions. Strong liquidity should allow it to meet debt obligations. Its steady process of replacing and modernizing the existing pipelines should further boost earnings. The company also acquired Shell’s assets, which should further boost its top-line performance.
The Zacks Consensus Estimate for NFG’s fiscal 2025 earnings has remained steady at $6.11 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same once, the average surprise being 9.49%. Shares of the company have gained 29.2% in the past year.
Sunoco LP is an MLP. The partnership’s prime business comprises the distribution of motor fuel to roughly 10,000 customers that include independent dealers, commercial customers, convenience stores as well as distributors. The customers are based in more than 30 states.
Its extensive distribution network and the Brownsville terminal expansion boost revenue diversification. Sunoco’s 7-to-10-year fuel supply agreements with >95% retention rate contribute to consistently high fuel sales volumes. The strategic acquisition of NuStar Energy’s extensive pipeline network supports business diversification. The acquisition also captures the benefits of vertical integration by merging two stable businesses. Sunoco’s Permian Basin Joint Venture with Energy Transfer, combining their respective crude oil and produced water-gathering pipelines, is anticipated to enhance the partnership’s distributable cash flow per LP.
The Zacks Consensus Estimate for 2025 earnings has moved north by 44.4% to $9.66 per share in the past 30 days. The company surpassed the Zacks Consensus Estimate in two of the trailing four quarters while missing it twice, the average negative surprise being 62.61%. Shares of SUN have declined 13% in the past year.
SM Energy, previously known as St. Mary Land & Exploration Company, is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.
SM Energy is focused on expanding its oil operations in the Permian Basin, Eagle Ford, and Austin Chalk regions, leveraging high-liquids production and acreage growth. The company’s diversification through Austin Chalk drilling helps mitigate regional supply and demand risks while enhancing portfolio value. A recent acquisition in the Uinta Basin significantly increased its core acreage and production potential, supported by operational efficiencies and premium crude pricing. Strong cash flow generation is funding dividends, debt reduction and growth initiatives.
The Zacks Consensus Estimate for 2025 earnings has moved north by 5% to $7.58 per share in the past 30 days. SM surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 11.7%. Shares of the company have gained 17.6% in the past year.
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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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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
Sunoco LP (SUN) : Free Stock Analysis Report
SM Energy Company (SM) : Free Stock Analysis Report
National Fuel Gas Company (NFG) : Free Stock Analysis Report
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