By Kalyan Nandy
Doesn't it seem that shares continuously hitting new all-time highs are already overpriced and may not appreciate further? It is a common perception, but not entirely true. The gaining streak may continue for many stocks. And you can easily gain by betting on them.
Generally, low price is the key element of value investing, as it makes all valuation multiples attractive. But the basic fact that is ignored here is that low price indicates the lack of enthusiasm of market participants to buy these stocks. Thus, the price may keep going down.
The exactly opposite logic works (though not always) for stocks with an upward price trend. Here, growing willingness helps these stocks to continuously move higher.
In fact, the returns from stocks reaching all-time highs generally outperform the returns from so-called undervalued stocks. So, buying these stocks and selling them at a higher price is a fairly lucrative strategy.
As you know, it is not safe to pour over only one indicator. In addition to keeping track of stocks continuously reaching all-time highs, you should look at some other indicators.
Valuation Not Worth Considering
You won’t find the valuation of these high flyers attractive, as their prices will make traditional valuation parameters unappealing. But make sure you take a look at the earnings estimate revisions and the earnings surprise history of these stocks. Needless to say, positive estimate revisions and a positive surprise streak will confirm your choice.
Analysts covering a particular stock often increase/decrease their earnings estimates based on certain developments at the company, or sometimes due to the sector or economy-related factors. They do it after their extensive evaluation on the fundamentals of the company. So, a positive trend in estimate revisions will give you further confidence about gaining from these stocks. It actually indicates that the stock will move higher in the coming days, tracking the trend in estimate revisions. (Read: Improving Your Value Investing)
Additionally, an impressive earnings surprise history will reflect the underlying strength in these stocks. (Read: What Is a Real Earnings Surprise?)
Beware: High Flyers May Crash
It's important to remember that betting on these stocks could become risky as their prices shoot up for reasons that are not always convincing. Sometimes, the big institutional investors -- aka "The Smart Money" -- push huge fund to attract retail investors by creating artificial price inflation. (Read: Is the "Smart Money" Taking Profits?)
So the rule of thumb is that if a stock sees a huge jump in price in a single day, you should stay away from it, as the chance of artificial price inflation is high. Stocks with real growth potential will move higher gradually, although not always in a straight line.
Endorse Your Pick With The Zacks Rank
A good way to finalize your choice is to look at the stock’s Zacks Rank. The Zacks Rank is a proprietary quantitative model that uses trends in earnings estimate revisions to classify stocks into five groups: Zacks Rank #1 (Strong Buy), Zacks Rank #2 (Buy), Zacks Rank #3 (Hold), Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong Sell).
Now, if you see that your target stock holds a Zacks #1 or #2 Rank, bet on that it should not disappoint.
3 Stocks Likely To Fly Higher
Based on the above strategy, we found the following three stocks we believe will give you solid returns. But don't stop with just these three -- continue exploring your options.
HollyFrontier Corporation (HFC): This petroleum refiner and marketer is one of the hottest high flyers, continuously hitting new all-time highs. The stock touched its highest mark of $52.50 on January 31. Looking at its estimate revision trend, over the past 90 days, the Zacks Consensus Estimate for 2012 was revised 19.3% upward to $8.71 per share. Moreover, the company has delivered positive earnings surprises in the last couple of quarters with an average beat of 13.0%.
We are also confident about a positive earnings surprise when the company releases its fourth quarter earnings on February 26, as it has a combination of Earnings ESP of +2.64% and a Zacks Rank of 2.
Tupperware Brands Corporation (TUP): This well-known kitchen and home solution provider has been continuously hitting its all-time highs, touching $76.35 on January 31. Also, earnings estimates for this Zacks Rank #2 stock have been moving higher. Over the last 60 days, the stock witnessed a 3.1% upward estimate revision for 2013 as the majority of the analysts were in agreement. It has delivered positive earnings surprises over the last 4 consecutive quarters with an average beat of 4.5%.
National Health Investors Inc. (NHI): It has been hitting rolling all-time highs and recently reached the highest mark of $63.87. This healthcare real estate investment trust (REIT) has seen its earnings estimate for 2012 moving 1.6% higher over the last 90 days. It has also delivered positive earnings surprises in 2 of the last 3 quarters. We are also confident about a positive earnings surprise in the fourth quarter, as it has a favorable combination of Earnings ESP of +2.41% and a Zacks Rank of 2.
Don’t Wait For A Dip
Don’t mix the traditional value investing perception of waiting for a dip while following this strategy. These stocks may not give you a chance to enter on a dip. In fact, a significant reversal is a hint for staying away from buying them.
Also, it is safe to select stocks that have been logging a number of new highs. Actually, this implies that these have gained momentum, which will help them fly higher.
Buy, wait and watch how high the stocks can fly!
Disclosure: The author has no positions in any stocks mentioned.