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5 Buys Near 52-Week Highs, 2 to Avoid

NEW YORK ( TheStreet) -- Buying a stock that is near a 52-week high is buying strength and going with the flow. Like a river, moving along with the flow can make your work much easier than trying to fight the market. For most investors, it's also more natural avoiding a contrarian view. The trick is not jumping into the river immediately upstream from a waterfall.

Historic stock performance indicates most stocks making 52-week highs continue to rise further. I have spent countless hours studying data on companies that are able to reach new trading levels and those that fail to continue higher.

While I haven't found a "magic bullet" if it's out there, I have found stocks with certain characteristics tend to have a higher performance ability than others. The result is a small group selected that are near or creating 52-week highs, and have the most favorable investor risk-to-reward ratio.

I use a filtering process that includes:

  • A minimum trading threshold; this eliminates the thin stocks that leave so many up late at night
  • Year-over-year results that are improving at a relative rate as stock price increase; we want plenty of reason why the stock should continue higher
  • Analyst price targets that are higher than the current price; we want others after us to continue the buying pressure
  • Limited insider selling; because of compensation methods and diversification goals, some insider selling is acceptable, but management should have skin in the game
  • Low short interest; I consider short sellers to be the smart money -- there is no reason to bet against them when we have plenty of stocks to pick from
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