10 top stocks hitting new highs

The annual debate among investors over whether to "sell in May and go away, stay away till St Leger Day", ended in a draw this year. Between early May and the St Leger festival at Doncaster races last week, the FTSE All-Share was broadly unchanged at a little over 4,000 points. But while the main index had an unremarkable summer, some shares have been flying.

One easy way to find out which shares investors have been chasing lately is to dig out a list of 52-week highs. This is a tactic we last talked about in this column back in April. Lists of 'new highs' are freely available in newspapers and websites, but the information can be much more useful than it first appears.

For a start, some of the world's best-known investors, like Richard Driehaus, William O'Neil and Mark Minervini, take a keen interest in stocks that are breaking new highs. They see it as a highly encouraging technical indicator and a sign that there could be momentum building behind a share price.

Academic research tends to agree with this idea. Analysis of stocks hitting 52-week highs has shown that this kind of momentum provokes a range of emotions in investors. The prospect of buying a stock that's hitting a new high is difficult, and this slow reaction can cause the price to drift higher over a period of several months.

Other research shows that the 52-week high actually creates a psychological barrier in the minds of investors. There's evidence that both investors and company analysts just stop believing that a stock hitting new highs will rise further. As a result, they end up being less objective, under-react to news about the share and may even end up selling it.

The net result is that stocks hitting 52-week highs can actually find their prices under pressure because of all the uncertainty among investors. And it takes time for that to unwind.

Building a stronger momentum strategy

The momentum triggered by events like the 52-week high is seen by many as one of the most powerful drivers of stockmarket returns. But on its own, momentum can be very precarious. If a 52-week high stock suddenly disappoints the market, the price reversal can be sudden and savage.

For this reason, momentum is often paired with other factors like company quality or stock valuation. This can ease the risk of sudden drawdowns by targeting stocks that are not only fast moving, but also have the financial quality to justify their popularity.

This week we've revisited the rules for finding companies that are trading close to their 52-week highs, but also have strong signs of quality. The quality aspect of the screen uses a QualityRank, which takes several measures of stability and cash flow generation, safety and improving financial health. Each stock is ranked in the market from zero (poor quality) to 100 (high quality).

Six months on from our last review of 52-week highs in quality shares, one of the notable findings is that the top stock in the list is exactly the same. FDM Group is a FTSE 250 IT services business that's added nearly £300 million to its market cap over the summer. Yet this is a high quality, low profile business that one wouldn't necessarily know about without the 52-week highs list. It's very useful example of how strong momentum can sustain over short periods of time and have a big influence on prices.

Exactly the same goes for Paysafe, the digital payments specialist, which was also high on the list in early April and has seen its momentum continues. More broadly, the companies here are larger than they were earlier in the year, with the likes of Hargreaves Lansdown, WH Smith and AVEVA all featuring.

Getting comfortable with 52-week highs

Considering that the 52-week high is one of the most accessible data-points about a share, it actually offers some extremely useful insight. The momentum effects that are triggered by new highs can be very powerful and continue to drive prices over many months.

But the risk with momentum on its own is that prices can crash suddenly if sentiment changes. For that reason, it makes sense to look for 52-week highs in tandem with factors like company quality. In the right combination, these two factors can produce stunning results.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.