Trading stocks that have made a 52-week high or a 52-week low is a common practice, particularly for momentum traders who understand the phenomenon that often exist between equity prices and the direction in which they’re moving.
I won’t pretend this theory is on the level of Einstein’s law of relativity. But historically and generally speaking, when momentum is at play, stocks trend and are less prone to reversing their direction, whether up or down. In other words, out-performing stocks such as, Netflix (NFLX), Amazon (AMZN) and Nvidia (NVDA) can continue to out-perform, while under-performing stocks continue to lose. Sears (SHLD), which for years has been a tremendous short to bet against, is a great example here.
In any event, while buying momentum stocks at 52-week highs have such mass appeal, it doesn’t always work. And I wouldn’t necessarily categorize it as a sound trading system, particularly for those investors who are honing their trading skills, nor would I recommend this strategy for new entrants to the market who are for the first time just dipping their toes in equities.
Making money on this (these) trade(s) requires not only nimble movement, but one must be willing to leave money on the table and be comfortable doing so. In other words, while you won’t be the first investor that enters the trade — given that the stock(s) is already at 52-week highs — you have to be willing to be one of the first ones out.
Pinpointing the timing could be difficult, but by closely observing the significant jumps in volume when a stock crosses a 52-week highs level, this tend to indicate the ideal time to exit the trade and take some (if not all) your money off the table. The goal is to make a profit and live to make the next trade. So without further ado, here are three stocks I would buy at 52-week highs and one I’m staying away from.
Sirius XM (SIRI) - Buy - Price Target $8
Shares of Sirius XM closed Friday at $7.24 and are up 35% year to date. The stock has returned 16% since the company reported a top- and bottom-line beat in first quarter results on April 24. Over the past 52 weeks, the shares have traded in a range of $5.09 to $7.24. Based on Friday’s closing price, the stock has risen 42% from its 52-week low.
The stock is currently priced at a forward P/E ratio of 30, based on fiscal 2018 earnings per share estimates of 24 cents per share. That valuation compares to a P/E of 19 for the average stock in the S&P 500 index. The forward P/E falls to 25, based on fiscal 2019 estimates of 28 cents per share. Will the recent positive trend for the company continue or is SIRI stock due for a pullback? I side with the former.
Subscriber revenues continue to be the driving force. In Q1 subscriber revenue, which now accounts for 81% of total revenues, grew 3.6% year over year to $1.12 billion. What’s more, Sirius added 330K net new subscribers, which now pushes its total subscriber number 33.1 million — better than 32.7 million as of Dec 31, 2017. Given that Sirius is the nation’s only satellite radio provider, it’s a virtual monopoly and a cash cow that is growing at a decent rate. And there is no sign of it slowing down.
Spotify (SPOT) - Buy - Price Target $200
One of the most highly-anticipated IPOs this year, the question of what investors should do with Spotify stock continue to come up, driven by competitive fears from, among others, music streaming giants Apple (AAPL), Amazon (AMZN) and Google (GOOG, GOOGL). Shares of Spotify closed Friday at $171.48 after reaching an intraday 52-week high of $172.93.
Not only is the stock now well above its first day of trading at close of $140.21, SPOT stock has now surpassed its first-day opening price of the $165.90.
In terms of valuation, it doesn’t make sense to focus on P/E here. Spotify is expected to lose money this year and next. In fact, the company is not expected to break even until sometime in 2020 — the second quarter of that year, according to some estimates.
Nevertheless, the fact that the company is already cash flow positive, growing rapidly and has the ability to scale globally makes it a force to be reckoned with. And I would be surprised if Spotify — at its current market cap of $30 billion — is not acquired by a company like Microsoft (MSFT) in the next two years.
Twitter (TWTR) - Buy - Price Target $50
Twitter shares, which closed Friday at $41.21, netted a new 52-week high of $41.26. The stock has traded in a range of $15.67 to $41.26 over the past 52 weeks. Based on Friday’s closing price, the stock has risen 162% from its 52-week low, making Twitter the top money-maker on this list over the past year. And that’s been a remarkable turnaround, given the deficits the company has had to overcome as it competes with Facebook (FB) and the arrival of Snap (SNAP).
The stock is not cheap, however. TWTR is currently priced at a forward P/E ratio of 55, based on fiscal 2018 earnings per share estimates of 75 cents. That P/E is about three time the average stock in the S&P 500 index. The forward P/E falls only to 49 based on fiscal 2019 estimates of 84 cents per share. In other words, Twitter does have a premium multiple. But the company is also projected to grow profits by an average of 42% per year in the next two year, including more than 70% this year. And as with Spotify, I peg Twitter as a top takeout candidate with Disney (DIS) and Salesforce (CRM) at the top of my list of acquires.
Valeant Pharmaceuticals (VRX) - Avoid - Price Target $20
Valeant stock closed Friday at $25.79, just below its 52-week high $26.09, which it made on Friday. Without question, under new leadership, the shares have been a remarkable turnaround story. Not only has VRX stock risen 24% year to date, including 16% just last week alone, the shares have returned 94% over the past year, trading in a range of $13.73 to $29.55 over the past 52 weeks.
Based on Friday’s closing price, the stock has risen 135% from its 52-week low. But I don’t believe its sustainable. While the valuation is appealing at just seven times this year’s estimates of $3.33 per share, this suggests a year-over-year decline of 13%. What’s more, the company still has $25.4 billion in debt on its books, while carrying just $720 million in cash, putting its net debt at $24.68 billion.
In an effort to put its troubled past behind, the Canada-based drug company is changing its name on Jul. 1 to Bausch Health Corp., with its new stock ticket being BHC. But unless it can change its debt profile along with it, I expect VRX stock, which has benefited from much easier comps, to correct when the Street’s execution expectations finally catch up with the stock’s performance.