When Hot Stocks Reach New 52 Week Highs
When hot stocks reach new 52 week highs, many investors struggle with their investment decisions… and rightfully so. The professional advisors are divided with research, charts, and analysis backing each of their opposing positions. Unfortunately, their combative conclusions leave the average investor with little to no consensus. So what is the average investor to do when they hold, or are considering buying, these hot stocks that are now reaching their new 52 week highs? Well… here’s some great practices that have resulted in consistent profits for my portfolios.
Hot Stocks Hit 52 Week Highs
Why? Before making any decisions, figure out why those hot stocks are hitting 52 week highs! It won’t take much effort… just a simple search or two at most. Here’s what I do… I begin with a quick Google search. Simply type in the name and symbol of the stock that’s hitting these new 52 week highs and look for the following two pieces of news:
Growing Revenue Forecasts – Most often appearing during earnings announcements, look for growing revenue forecasts. Notice, we’re less interested in the EPS and reports of what the stock “did” and we’re more interested in the earnings forecasts and what the stock “will do.” One of the most amateur mistakes made by investors is investing in the past performance of a stock rather than looking to see if revenues are likely to continue to grow. Remember, revenue is the engine that drives stocks upward!
Analysts Upgrades – Less important, however just as responsible for a stock price climbing to new 52 week highs, are the upgrades of various analysts. When analysts raise their expectations, it typically results in stock prices climbing, often to newer highs.
As you can tell, I’m looking for revenue acceleration and growth. This is the type of assurance that results in consistent profits and confidence when investing in stocks that are reaching new 52 week highs. Without it, deflating stock prices and disappointed investors will be the result the near future.
52 Week High – Buy, Sell, or Hold?
There is no simple answer for investors who are wondering what to do when a stock hits a new 52 week high. Take, for example, Apple… perhaps investors have watched this stock climb for several months and often regretted buying in when it was sub $400 per share.
So, as it approached its earnings announcement on January 24, 2012, many investors heard the rumours of this stock becoming the largest market cap stock on any North American stock exchange. Then, when the official announcement was made and the earnings blew away the expectations, some thought this might be the time to jump in. But, remember… ask those “why” questions and toss aside the majority of the news and focus in on the revenue forecasts.In the case of Apple, they were optimistic and the signs (new products, international expansion, rumoured dividend, etc.) pointed toward further rises in this stock.
Here’s how I would manage my interest in buying Apple if I wasn’t already in this stock having already answered the “why” question:
Buy the Rise – This fundamental principle here at Invest in the Markets ensures investors don’t buy a stock that is falling… despite our best research and conclusions. So, we wait and buy the rise… only as it goes up. So, practically, this is what that would look like around Apple’s last earnings report. It opened on the 25th at $454.44, a $34.03 increase from the previous day’s high, and fell throughout the day… setting its range between $454.44 (the high) and $443.73 (the low). I’m looking to buy Apple above the $454.44 high (I have a predetermined level that I’ve found reliable) and if that purchase order triggers, I have my stop loss set for a price slightly lower than $443.73 (the low). This trade defines the risk at approximately 2.5%… a very manageable risk for what I perceive as significant upside potential. Then, if the buy order triggers and the stock rises (as it would have in this case), I simply allow the rising stock price to pull up my stop loss order.
Adjust your Stop Loss Orders – Let me just carry on the above example a little further… you can adjust your stop losses manually (my preferred method) or set up a “trailing stop loss order” if you’re broker allows this function. Essentially, within a few days of the purchase order being triggered, you’d have an inherently risk free trade as Apple shot upward in the two weeks that followed. Whenever there is a gain over 5%, I split my stop loss into two stop losses (one tight, one a little looser).
The worst case scenario is you buy Apple, after doing your quick research and confirming their increasing revenue forecast, and it drops… for a small, predefined and controlled loss. This is a great example of how we “minimize the risk.” Remember, you can always get back in if it goes above your target and begins to set new 52 week highs.
But how would I manage Apple if I was already in this stock and had some significant profits? When is it time to sell? That question can sometimes be harder than knowing when to buy… in fact, it really addresses a more fundamental issue of how to develop an exit strategy, a key topic I’ve addressed in several articles in the past. Take a look at least the one I’ve highlighted for you… and then read on. Here’s a couple considerations of when to sell if the stock is climbing to new 52 week highs and you’ve satisfied the “why” question:
Adjust your Stop Loss Orders – As a stock rises and my potential profits rise, I expand my stop loss orders. For example, if my stock is up 5% plus, I’ll set one stop loss based on a daily chart (tight to the current price) and the other half on a weekly chart (slightly looser). As the stock rises to 15% plus, I’ll often adjust these two stop losses and use the weekly technicals for the 1st half and the monthly for the second half. Don’t get too caught up in my specifics… the principle is this: In order to maximize your returns without losing all your gains, you have to set your stop loss orders to ensure you put some profit in your pockets without selling out to fear the first time the stock price dips.
Consider Separation over Divorce – It’s time to lose the mentality that says, “all or nothing.” Many investors feel their only options are to hold it or sell it… and walk away. But just because you sell out of a stock position doesn’t mean you can’t reenter? Read about your option of separation over divorce that I wrote about over a year ago. Take Apple again, as an example… let’s say you did buy it slightly higher than the $454.44 high after the January earnings announcement… and on March 6th, you got scared after the previous day’s huge dip in the stock price and found yourself out of it completely. You’d have a 10% plus profit in your pocket… but that doesn’t mean you’re done with Apple now! Use the same principles as explained in the first example… and set your new purchase order slightly above the recent 52 week high… above $549… if you were to do that, you would have been back in and be sitting up at $625 or so today… another 10% plus gain with very little risk.
Friends, I know this is getting a little long… so let me wrap it up. By the way, I can’t wait for your questions and comments… so shoot away. Quite simply, if you follow these simple practices, you’ll find one of the most exciting and profitable times to invest is when those hot stocks reach new 52 week highs, especially when driven by revenue forecasts around earnings announcements.
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