Five Buys Near 52-Week Highs

NEW YORK (TheStreet) -- Everyone loves a bargain, so it may feel wrong to buy stocks when they are near 52-week highs. But what many investors forget is that we don't invest because we can predict the future. When we invest, we are predicting the odds.

Predicting the odds means we don't care where the stock has been, we only care about what the odds are for it to move either higher or lower.

For example, if we look at Apple's ( AAPL) price chart, we see that in February it traded above $500 for the first time. Buying Apple stock for more than $500 may go against our bargain-seeking instincts, but it's clear now that purchasing Apple at $501 in February would have been a great buy.

However, mindlessly buying any stock near 52-week highs can put you in the precarious situation of being a "bag holder," someone who buys a stock right before it falls in price.

There are some things we can do to avoid bag-holder status. I search for stocks near their 52-week highs and attempt to filter out as much emotion as I can. I remove stocks with nosebleed price-to-earnings ratios and buyout rumors, one-hit wonders (especially prevalent in the pharmaceutical industry) and other emotionally charged "runners."

My goal is a compilation of high-liquidity, longer-term holds (at least six to 12 months) that we can write options on for risk mitigation. Selling covered calls or selling cash-secured puts is a lower-risk strategy to gain exposure.

I use a filtering process that includes:
  • A minimum liquidity requirement -- This eliminates the thin stocks that keep so many up late at night.
  • Improving year-over-year results relative to the stock price increase -- We want plenty of reasons why the stock should continue to move higher.
  • Analyst price targets that are significantly higher than the current price -- We want others to believe the stock will continue to appreciate.
  • Limited insider selling -- Generally we want to see no insider selling. But because of compensation methods and diversification goals, some insider selling is acceptable.
  • Low short interest -- I consider short sellers to be the smart money. They don't always get it right, but bet against them enough and you probably won't come out ahead.

Here are five stocks near their highs that may be worth buying:

HD Chart HD data by YCharts

Home Depot (HD)

Background: Home Depot is the one of world's largest home improvement retailers. Home Depot stores cater to do-it-yourselfers, as well as home-improvement, construction and building-maintenance professionals. Home Depot trades an average of 9.2 million shares a day and has a market cap of $83.7 billion. (See More: No Zero Sum Game in Retail)

52-Week High: $54.98

52-Week Low: $31.03

With more than 9 million shares traded daily, the bid-ask spread will be small. Revenue and earnings are higher year-over-year. Home Depot has also beat estimates in four of the last five quarters.

Home Depot's dividend has a yield of 2.2% and has increased an average of 9% a year over the last five years. As with most stocks near a 52-week high, the last reported short interest is tiny. Short interest is only 1.5%.

On the negative side, the mean analyst price target is $55.17. I expect the price target to work its way higher as the target is met, but it may take a week or two. The P/E ratio is on the high side, but not after factoring in the top- and bottom-line growth.

I think Home Depot is a buy on dips.

RF Chart RF data by YCharts

Regions Financial (RF)

Background: Regions Financial has banking-related subsidiaries engaged in mortgage banking, credit life insurance, leasing and securities-brokerage activities with offices in various Southeastern states. Regions trades an average of 16.5 million shares a day and has a market cap of $10 billion.

52-Week High: $7.17

52-Week Low: $2.82

Regions is one of the most liquid stocks traded, with over 16 million shares changing hands a day.

I really like Regions because, based on technical analysis, the stock is trading near a 52-week high with a strong base in price support. More impressive is the 60% climb in price over the last year. The mean analyst price target is $7.46. As with Home Depot, I would prefer a higher price target or a dip in price before entering.

Short interest is very small at about 1.5% and well below my comfort-level threshold. After some losses and even a decline in revenue, Regions is on the right path for a respectable P/E ratio. Regions also beat in the last four out of four quarters.

GE Chart GE data by YCharts

General Electric (GE)

Background: GE is one of the largest and most diversified industrial corporations in the world. Its products include major appliances, lighting products, industrial automation products, medical diagnostic imaging equipment, motors, electrical distribution and control equipment, locomotives and power generation and delivery products. GE trades an average of 32.8 million shares a day and has a market cap of $221.1 billion.

52-Week Range: $14.02 to 21.19

52-Week High: $21.19

52-Week Low: $14.02

GE is one of my favorite companies. It was a core holding and a daily trading vehicle for me for several years. In 2009, with a cost basis of near $7, I exited with a small profit. There was a real worry GE might fail due to the GE capital division dragging it down.

Three years later, the stock price has tripled. And after dividends, it has earned an investor even more. With a 68-cent dividend, GE is yielding over 10% for those with a cost basis near $7. The ride doesn't appear to be over yet, though. Profits are moving higher, and so is the stock. At the end of 2007, GE was trading for more than $40 a share, leaving plenty of upside based on historical prices.

The moving averages are clearly in the bull camp. GE may bounce around a bit, but it does appear poised to make the next leg higher.

Short interest is not a factor, with less than 1% of the float short. And analysts are anticipating continued price appreciation; the mean analyst price target is $22.50.

GE's P/E multiple is higher than many blue chip stocks, but not out of line at about 14. If you can grab shares on a dip at about $20.50, consider it a good buy.

S Chart S data by YCharts

Sprint Nextel (S)

Background: Sprint offers a comprehensive range of wireless and wireline communications services. Sprint trades an average of 65.3 million shares a day and has a market cap of $15 billion.

52-Week High: $5.10

52-Week Low: $2.10

I love Sprint, although I don't love it as much over $5 as I did near $2.50. When Sprint was trading near $2.50, I wrote my bullish bias in the Rocco Pendola Options Newsletter, and in several TheStreet articles.

Those who have stuck with Sprint can hear me now. Sprint is what happens when you have a great company making all the right moves and the stock is in the dog house. Inevitably, sooner or later, the big money figures out that the stock is undervalued and begins to accumulate shares.

It is not hard to see the impact when money rolls into a newly loved company. Sprint has appreciated about 40% this year.

Part of the move higher may be due to short sellers covering their positions. The short interest is slightly over 5% in the last reported update, and I imagine it has fallen or at the most remains placid. We should know with the next update in the next day or two.

As bullish as I am on Sprint, I don't normally chase stocks. Sprint is great, but I think it gives us another crack at $5 before legging up again. With such a small per share price, each penny means a lot in terms of percentage gains for your portfolio.

SIRI Chart SIRI data by YCharts

Sirius XM Radio (SIRI)

Background: Sirius Satellite Radio is a digital satellite radio system that broadcasts music and entertainment programming to motorists throughout the continental United States. Sirius trades an average of 109 million shares a day and has a market cap of $9.6 billion.

52-Week High: $2.54

52-Week Low: $1.27

I have been on both sides of the fence with Sirius. First, I was a bear, or at least not a bull, starting in March 2011. Lately, I'm a bull. Sirius enjoys a very large listening fan base, and a very large and vocal equity fan base. As one of the most widely held stocks, there are plenty who will point out how your opinion is wrong if they don't agree with the assessment.

Sirius ramped up in price over the last month as Liberty Media bought shares and on news of Liberty Media buying shares. I think Liberty Media's move to increase its stake in Sirius is a double-edged sword. If and when it buys a controlling interest to take advantage of the loss carry forwards Sirius has, the little guy may not fare so well.

The smart money, which is looking more like dumb money at the moment, is short Sirius relatively strongly. Nearly 10% of the float is short, and 9.6% is enough of a short interest to cause any investor to question what the shorts know that others do not.

For those willing to accept a larger risk level, Sirius does offer the potential for a greater percentage gain compared to most stocks because of the relatively low trading price.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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