Top Stocks with Big Potential Catch-Up Moves

There's an old adage that roughly half of a stock's price movement can be attributed to the group that it's in and investors can use that to find stocks with more upside potential.

This article was originally published by Zacks.com.

Given the recent run-up in the market, here's a screen I've been using recently for my own stock picking.

First, it focuses on the top Zacks ranked sectors and industries. Then it focuses on the Strong Buys, Buys and Holds. Finally, it selects the outperforming stocks with the smallest percentage price change over the last four weeks.

Why would I do something like that?

You've probably heard the old adage that roughly half of a stock's price movement can be attributed to the group that it's in. And that's true. In fact, oftentimes, even a mediocre stock in a top group will outperform a top stock in a poor group for this very reason.

Now, take a look at any top group. You'll see plenty of fantastic stocks with some impressive price gains in there. But not every stock in every group moves in lockstep at the exact same time. Some will move more than others at any given time.

So by focusing on the stocks with the smallest percentage price change with fundamentals that are just as good as those making the biggest price change, you might find yourself getting into the stocks ready to make the biggest potential catch-up move.

Here's how to set up that screen:

Best Zacks ranked sectors — best eight

We're screening for only those stocks with the best (lowest) average Zacks Rank. With 16 sectors, the best eight sectors give us the best 50% of sectors.

Best Zacks ranked industries — best 132

Next step is to get only the best Zacks Ranked Industries coming thru. Since there are 264 'X' or expanded industries we look at, the best 132 will give us the best 50% of industries. But note that only the industries that also happen to be in the top sectors will get through. If an industry is ranked as one of the best but it's outside of the top sector rank, it will not get through.

Zacks rank less than or equal to three

Now, the screen gets narrowed down even more by looking at only the stocks that are ranked as Strong Buys, Buys and Holds. No Sells or Strong Sells allowed.

Price and average volume greater than or equal to $5 and 100,000 shares

Only stocks over $5 with at least an average of 100,0000 shares traded daily will be considered.

Relative percentage price change — four weeks greater than zero

This means we're screening for only those stocks that have outperformed the market (S&P 500) over the last four weeks.

Percent change in price — four Weeks: Bottom 50

Then finally we're scanning for the bottom 50 stocks with the lowest percentage price change over the last four weeks. So while all of these stocks have outperformed the market, they increased in price less than their peers.

So each one of these stocks is in a top sector and a top industry within that sector. This alone will tip the odds of success in your favor by a great deal when you consider that the best Zacks ranked groups outperform the worst ones by a factor of 2:1.

Then by selecting those stocks with the best Zacks rank along with the best price performance over the last four weeks, you now have only a list of winners from which to choose from.

And from that list of winners, we're selecting the ones that have gained less than their peers on that list. Remember, these stocks aren’t 'dogs' or unresponsive stocks. Quite the contrary: they have all outperformed the market. It just so happens that they increased less than the others on the list. But because they are a top-rated stock in a top-rated industry, we've singled these out as the ones that could make the biggest move to 'catch-up' to the others.

It's an interesting screen that has generated a lot of great names.

Here are five from that list:

Activision Blizzard (ATVI)

Cit Group (CIT)

Isis Pharmaceuticals (ISIS)

Kansas City Southern (KSU)

Ugi Corp. (UGI)

All great looking stocks that seem to have a lot more upside in store for them.

Kevin Matras is a Vice President at Zacks Investment Research, where he is the fundamental stock screening and technical chart patterns expert.

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