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
  • DTV Chart DTV data by YCharts

    DirecTV ( DTV)

    Background: DirecTV is a provider of digital multichannel television entertainment in the U.S. and Latin America. DirecTV trades an average of 3.5 million shares per day with a marketcap of $32.8 billion.

    52-Week High: $52.98

    Over half the analysts covering DirecTV rate it as a buy or strong buy. Thirteen of the 21 analysts covering the company give a buy recommendation. The average analyst target price for DTV is $56.10.

    The 60-day moving average (some use a 50-day) is above the 200-day moving average, which is a positive indicator for chart technicians. Trend followers love this type of consistent bull pattern and will hold a position until a technical break results in a signal to exit.

    The trailing 12 month price-to-earnings ratio is 13.5, the mean fiscal year estimate price-to-earnings ratio is 12.3, based on earnings of $4.24 per share this year. Low earnings multiples leaves room for DirecTV to appreciate higher.

    DirecTV shares are up 8.4% since the last earnings report on July 2. With Wednesday's break above the highs of last week, DirecTV may be at the start of another leg higher.

    Currently, the short interest based on the float is small and not a big concern. Short interest is 2.3% and is relatively stable over the last year.

    GILD Chart GILD data by YCharts

    Gilead Sciences, Inc. ( GILD)

    Background: Gilead Sciences is an independent biopharmaceutical company that seeks to provide accelerated solutions for patients and the people who care for them. Gilead trades an average of 4.3 million shares per day with a marketcap of $43.9 billion.

    52-Week High: $58.84

    More than 70% of analysts rate Gilead a buy or strong buy out of 23 analysts following the company. The average analyst target price for Gilead is $64.22. The trailing 12 month price-to-earnings ratio is 17, the mean fiscal year estimate price-to-earnings ratio is 17.1, based on earnings of $3.39 per share this year. I want to see a growth in earnings coupled with an earnings multiple that isn't too rich at the point of the new 52-week high. Gilead's earnings multiple has ample room to grow and maintain a level under 20 (about as high as I feel comfortable with).

    Gilead's chart looks great and is in a steady bullish trend. The moving averages are trending higher with pleased shareholders. Trend followers look for this type of pattern and will ride a position until the trend ends.

    Gilead's short interest based on the float is small and not a big concern. Short interest is 2.4% and is at the higher end of the range over the last year. If short interest continues to grow, consider it a red flag. In the meantime, option trading volume has increased, and investors position as a result of the new highs.

    SNV Chart SNV data by YCharts

    Synovus Financial ( SNV)

    Background: Synovus is engaged in two reportable business segments: banking and transaction processing. Synovus was founded in 1888 and is headquartered in Columbus, Ga. Synovus trades an average of 5 million shares per day with a marketcap of $1.7 billion.

    52 Week High: $2.22

    Analysts are more or less side stepping this one, but have a mean target price of $2.30. Stocks trading under $5 are generally considered bankruptcy candidates and Synovus illustrates why. Shares have lost over 80% of their value since highs of 2008. Maybe the stock has finally found bottom.

    Shares have climbed as a result of ongoing developments with M&T Bank ( MTB) and their TARP repayments schedule. TheStreet's Philip van Doorn covers the status in greater detail in this article.

    Synovus has turned over a new leaf and is in a classic bull trend. The moving averages are trending higher, and shareholders may have a reason to cheer. Trend followers look for this type of pattern and will hold a position until the trend comes to an end.

    The mean fiscal year estimate price-to-earnings ratio is 22.2, based on earnings of 10 cents per share this year. I find the earnings multiple rich, and for me, I will wait until a dip before moving forward. As a rule, I don't care to chase stocks either higher or lower, and once the premium grows above 20, I become skittish.

    Shareholders receive 4 cents annually in dividend payments, for a yield of 1.86%. The current proportion sold short based on the float is 6.4%.

    DHI Chart DHI data by YCharts

    D.R. Horton ( DHI)

    Background: D.R. Horton is one of the largest homebuilders in the U.S., building high quality, single-family homes designed principally for the entry-level and move-up markets. D.R. Horton trades an average of 5.1 million shares per day with a marketcap of $6.2 billion.

    52-Week High: $19.58

    Yield: 0.77%

    From a technical perspective, Horton is firing on all eight cylinders. The moving averages are rising at a steady continuous sustainable climb. The resistance levels have been tested numerous times with follow through.

    The average analyst target price for Horton is $19.75. Considering the price is already well above $19, this is one I would hold off on until the next dip. Another reason for keeping the powder dry is the mean fiscal year estimate price-to-earnings ratio is 24.3, based on earnings of 80 cents per share this year.

    An earnings multiple above 20 usually catches my attention and as political as the housing market is, I would never consider chasing this one higher. A dip down to the 60-day moving average near $18 a share appears to be the conservative play. With a 50 cent stop loss, you give yourself a chance to make at least $1.50 a share.

    Horton pays 15 cents a year in dividends for a yield of .8%. Short interest is 12.9%, and should be treated as a red flag that short sellers expect the price to fall.

    DIS Chart DIS data by YCharts

    The Walt Disney Company ( DIS)

    Background: Walt Disney is a diversified worldwide entertainment company. Disney trades an average of 6.7 million shares per day with a marketcap of $89.1 billion.

    52-Week High: $50.65

    Yield: 1.21%

    Analysts as a whole like this company. Currently, Disney has 16 buy recommendations out of 25 analysts covering the company and the average analyst target price for Disney is $54.00.

    From a technical perspective, the chart on Disney looks nearly perfect. The widely followed fast-moving 50-day average is bullishly trending above the 200-day moving average which is in turn trending higher.

    Mickey and friends have set Steamboat Willie on a near-perfect 40 degree climb toward profitville. For the entire 2012 trading year, every dip in price has been a buying opportunity. Wednesday marked just one more in a string of new 52-week highs without creating a cause to believe anything would change.

    The trailing 12 month price-to-earnings ratio is 16.7, the mean fiscal year estimate price-to-earnings ratio is 16.1, based on earnings of $3.09 per share this year. With earnings multiples this low and healthy growth on the top and bottom lines, expect Disney's shares to continue running like Bolt.

    Disney has an annualized dividend of 60 cents, yielding 1.21%. Over the last five years, the dividend has grown by an average of 8.2% per year. Short interest is 2.8%.

    PHM Chart PHM data by YCharts

    PulteGroup ( PHM)

    Background: Pulte is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses. Pulte trades an average of 13.1 million shares per day with a marketcap of $5.3 billion.

    52-Week High: $13.91

    Pulte is the second company within the building industry qualified to make this list. Like Horton, I am not ready to turn bullish on building yet.

    Technically the chart is strong enough to make a fresh 52-week high on Wednesday. The 60-day moving average is above the 200-day moving average while in turn is moving up at a steady pace.

    Shares are relatively low in price near $14 a share, but even so, the stock is trading at over 50% premium relative to the 200 day moving average. When shares trade above 150% of the 200-day moving average it sounds a weak alarm to go slow and use caution.

    The trailing 12 month price-to-earnings ratio is 43, the mean fiscal year estimate price-to-earnings ratio is 26.8, based on earnings of 51 cents per share this year.

    The current proportion sold short based on the float is 9%. A short interest this high is another red flag. Bottom line is it won't cost you anything to avoid this one, and may save you a bundle.

    SIRI Chart SIRI data by YCharts

    Sirius XM Radio ( SIRI)

    Background: Sirius broadcasts music and entertainment programming to motorists throughout the continental United States. Sirius trades an average of 46.3 million shares per day with a marketcap of $9.7 billion.

    52-Week Range: $1.27 - $2.64

    Sirius continues to trade near the 52-week high, and is an attractive covered call writing stock. Because the float is so massive and Liberty Media is near taking control of the company, covered call writing is a lower risk, better bet from my seat.

    The trailing 12 month price-to-earnings ratio is 36.3, the mean fiscal year estimate price-to-earnings ratio is about 20, based on earnings of 10 cents per share next year.

    Short interest over 10% should give pause to investors looking at this company. The current percentage of the float short is 10.1%.

    I use SEC.gov, Zacks.com, WSJ.com, Tradestation, and Reuters for my data. PE is generally adjusted based on an average number of shares and for operational earnings.

    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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