At 5i, one of the core screeners we feel works well over time but tends to be underestimated or misunderstood by the majority of investors is the combination of high-growth businesses that trade at a 52-week high.

The conventional wisdom when investors see stock charts that go up and to the right is that:

1)    Investors tend to think they have already missed the ride and will remind themselves to get back to the name when there is a correction. But when the corrections actually happen, they do not have the resources or the guts to buy.

2)    Investors who hold those stocks may think about how to book profits and keep the gains rather than continuing to ride along with them.

3)    Lastly, and the classic one: Investors think to themselves, “these stocks already went up that much, how much farther can they really go?”

The broader investment education for most investors tends to focus extensively on how to deal with downside volatility (when stocks experience corrections) but there is not enough education on the topic of “upside volatility”, i.e. stocks that can go up too far, too fast. Most of the time, investors sell stocks that go up too fast, only to regret it later, as those companies continue to do well and hit new highs. We think investors tend to underestimate how long momentum can last if the company continues to execute, and investors should not be afraid to own names that hit new highs just because they have already gone up. At the end of the day, investing is an endeavour where investors need to deal not only with numbers but their psychology.

We think the simple combination of high-growth stocks that trade at 52-week highs could work well over time for a few reasons:

1)    Attractive growth stories are rare in the public market and seldom trade cheaply, and most of the time, the investing community tends to underestimate these growth names.

2)    Great companies with strong growth can likely stay in the trading range of 52-week highs rather than lows, and great compounders will consistently exceed previous highs.

3)    It is a strong signal that something is going right at the company, and investors start to recognize it. For example, the market may start to price in the upside potential somewhat, but may underestimate the company if it continues to launch a new product or expand to a new market.

4)    Respecting the wisdom of the crowd: Stocks do not usually get bid up to crazily high levels often (except during a frothy market). A growth story that is supported by solid fundamentals at reasonable prices can be a solid formula to seek for long-term compounders.

Below we have screened for companies with the following criteria:

• Market capitalization of at least $100 million
• Revenue growth over the next two years of at least 15%
• Earnings per share (EPS) growth over the next two years of at least 15%
• Companies that are trading within 10% of their 52-week highs

The criteria for the screen are quite simple. Here, we screen for companies that are over $100 million, as these companies have had decent operating track records for investors to evaluate, and are relatively liquid for investors to acquire positions. Fundamentally, we look for businesses that are expected to grow their topline and bottom lines by 15%, each over the next two years.

Lastly, we screen for companies that are currently trading at or below 52-week lows within 10%. We think these companies are experiencing solid momentum in share price. We think some companies in the list are less well-known, less covered by mainstream analysts and investors, while the fundamentals are quite decent.

The screener came up with 10 names, members will recognize some of the names that we cover in our Model Portfolios and coverage lists, such as TerraVest Industries (TVK), Zedcor (ZDC).

Again, these companies on the list are not recommendations but a starting point that helps investors generate potential investment ideas and strategies. Investors can view our previous screener blog here.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.