One of the most important lessons that we must learn as investors is to avoid the temptation to follow the herd into a winning stock that has run out of steam. Buying shares in a stock that have already enjoyed strong gains can be risky, as by the time the stock has made its move, the good news that drove the stock higher has already been priced into shares, and by the time average investors jump on board the gains have been exhausted.
Two things to remember to avoid are the temptation to buy stocks that have exhausted their upside potential, and jumping into stocks that have just experienced a major sell off with the idea that shares have to rebound. More often than not, such moves wind up costing money, but that is not always the case.
While you never want to follow the herd into a stock that has run up in value, that does not mean that every stock trading near its 52-week high is a bad investment idea.
Buying stocks near their high can be scary, but if we exercise some discipline, and implement the same screens we would use on other stocks, we can buy into high-flying stocks with reasonable confidence.
We want to make sure that any stock we buy is trading at a reasonable valuation. Screening for stocks with attractive valuations is a crucial first step whenever you’re looking at stocks, as it will determine whether or not the stock has entered into overbought territory.
After screening for valuation, we want to take a look at the company’s future earnings growth estimates. The better the estimates, the more attractive a stock becomes, and in some cases it can even allow us to overlook a slightly high valuation.
The overall market has struggled to find direction in recent months, but the following stocks have been high-flyers, and appear to have more room to run.