Focus On 52-Week High Stocks To Beat Markets

Focus On 52-Week High Stocks To Beat Markets

 
Different investors adopt different strategies to beat the markets. Investing in equities using 52-week high and 52-week low data is one of the most popular methods for several investors. Tanal Loya unearth the secrets of 52-week high-low investing and come up with some profitable observation

Anyone who has traded in the market for long would know the importance of having an advantage in the market. Experts believe that one should not trade in the stock market unless one has an advantage. Such advantage could be in the form of access to private information not known to the public (known as insider information), or it could be an ownership of a unique strategy that beats the market consistently. While trading on the basis of insider information is illegal not only in India, but also around the world, having a market beating strategy evokes a never-ending discussion in academia and in the investing community. The best among investors in the world have applied their mind on working out a strategy that consistently beats the market over the long term and history suggests that very few have been able to do so. 

“Buying stocks that are near their 52-week highs” is one strategy that does not require tremendous amount of scanning of data or super intelligence or so-called insider information to beat the markets consistently. The best part of investing in 52-week high stocks is the easy availability of the data on 52-w high and 52-w low stocks

“52-w high” and “52-w low” is one of the most widely used data by investors. The data on 52-w high and 52-w low is most consumed when it comes along with the P/E ratio of the stock. 

While there is no doubt that the 52-w high and 52-w low data is used by very many investors in their research for investment decision-making, the concern pertains to the interpretation of the data and the wrong bias that an investor has towards the 52-w high and 52-w low data. 

Many investors perceive 52 w-high as resistance level and 52 -w low as support levels. Investors and traders commonly consider the 52-w high as a price level where profits need to be booked as it is perceived that the stock has run ahead of its valuations. 

Empirical evidence suggests that stocks hitting their fresh 52-w highs continue to show strong momentum and tend to outperform. There is enough evidence which highlights the outperformance of stocks that have hit 52-w highs when compared to those that are trading far below their 52-w high prices or are close to their 52-w lows. 

If we take a look at the BSE 500 stocks which hit their 52-w highs in the month of December 2016 and analyse their performance over the next one year, the results are an eyeopener. There were nearly 37 stocks that made their 52-w highs in December 2016, while there were as many as 27 companies that touched their 52-w lows in the same month. The performance of the 37 companies that touched 52-w highs is seen far more superior in the one year thereafter, than to that set of 27 companies which touched their 52-w lows in December 2016. Out of the total 37 companies which hit their respective 52-w highs, almost 16 companies managed to beat the BSE Sensex. That is, almost 43 per cent of the companies that touched their respective 52-w highs in December 2016 managed to beat the Sensex one year thereafter. 

Sensex has risen by nearly 28 per cent from December 2016 to December 2017. There were 9 companies that recorded negative returns in the one year after December 2016 even after touching their 52-w highs in December 2016. That means almost 24 per cent of the total companies that touched their respective 52-w highs managed to deliver negative returns. 

Now, let us have a look at the data pertaining to the stocks that traded near their 52-w lows in December 2016. Out of the total 27 stocks that touched their respective 52-w lows, we find that 8 stocks have given negative returns one year thereafter, which is almost 29 per cent of the total stocks that touched their respective 52-w lows. While the number of companies that beat the Sensex stood at 12 representing almost 44 per cent of the companies that touched their respective 52-w lows. The average outperformance remained much lower than compared to those stocks that traded near their respective 52-w highs. 

Investors while looking at easily available data of 52-w high have a tendency to overlook the valuations and focus only on the 52-w high data point. Investors forget that a stock trading at 52-w high need not necessarily be overvalued, as the stock may be cheap on P/E basis. A stock hitting a 52-w high thus become psychologically important for investors and there is a tendency to book profits when a stock is near its 52-w high. Says Ritesh Gujarathi, who believes in long term investing, “As a strategy, I used to regularly book out of the stocks when the stocks touched their respective 52-w highs only to see later the stock prices soar higher once I sold them”. 

If we extend our research to the small-cap stocks, we notice that the performance for the small-cap stocks that hit their 52-w highs in the month of December 2016 is better than for those stocks that hit their 52-w lows not only on one-year basis, but also on 3-month, 6-month and 9-month basis. The stocks that are hitting 52-w highs in the period under consideration have outperformed BSE Sensex as well, as seen in the table below. 

"52-w high is nothing but the highest price at which shares have traded in the past one year. This reference point numerically may not have any special value, but psychologically this data is extremely important and does impact the way investors look at the stock. "

"A common misconception about 52-w high among investors is that 52-w high might not be a good time to buy because the stock is overvalued. In fact, few investors think if the stock is near its 52-w high, it is a signal that it is a good time to sell. "

For those small-cap stocks which hit their respective 52-w highs in the month of December 2016, the average returns in the next three months, six months, nine months and twelve months were 12.25 per cent, 17.97 per cent, 28.05 per cent and 56.77 per cent, respectively. This compares favourably with the data for those small-cap stocks that touched their respective 52-w lows in the month of December 2016. 

We evaluated the performance for three years in order to do away with the bias of including observations only for the year December 2016-December 2017, where the YTD performance of the market is extremely positive with Sensex delivering nearly 28 per cent returns. The data is quite conclusive and in favour of small-cap stocks that touched their 52-w highs when compared to those stocks which touched their 52-w lows in the same period. In other words, we can say that the expected performance in small-cap stocks that are near their 52-w highs can be much better than those stocks that are near to their 52-w lows.

Tejas Khoday, Co-Founder & CEO, FYERS 

"In a bull market like this, it doesn’t make any sense to invest in stocks which are at their 52-week lows because there is a reason that despite all the optimism in the market, these stocks have fallen. Generally speaking, even mediocre stocks have gone up on the expectation of earnings improvement or on mere speculation that things will be better in the future. In such an environment, there have been many stocks which have failed to gather momentum due to their underlying problems in their businesses."

WHY 52-W HIGH STOCKS OUTPERFORM:-

While investors and traders have a tendency to book profits when a stock touches its 52 week high due to psychological reasons, we have seen that the strong momentum in the stock continues even if the traders are reluctant to bid the price of the stock higher. The fundamentals for the stock do get factored in and the positive information prevails and eventually pushes the stock price higher which results in continuation of the uptrend. 

It is also observed that when a stock manages to cross the 52-w high level, which acts a strong resistance zone due to mental barrier, the volume generally increases in the stock and the price moves upwards, reflecting the true fundamentals of the stock. 

Another observation that an investor must make to support the investment decision-making is to see whether the other stocks in the same industry are touching their 52-week highs. In case it is seen that other stocks in the same industry are also making new 52-week highs, it does make the case for investing much stronger. A case in point is the manner in which stocks in paper , metal and realty industries behaved in the past one year. At times, the momentum in the individual stock's returns is driven by momentum in industry returns. There may be a positive development in the industry which is leading to improved fundamentals for all the companies in the industry, which is expected to translate into better earnings and profitability for most of the well- run companies in the industry. Such positive industry-wide trend is one of the most bullish indicator one can rely on for out performance. 

CONCLUSION :- There is evidence of excess gain that investors can make by betting on stocks that are near their 52-w highs. While the excess gain can be attributed to the under-reaction by traders and investors to the positive news affecting the stocks, it is also seen that the excess gains are prominent in the thinly traded scrips, i.e small caps. While investors may or may not prefer to trade based on 52-w high strategy, one thing is for sure that the 52-w high and 52-w low data cannot be ignored by investors and traders. The out performance by those stocks that are near their 52-w highs warrants more attention from the investors on the data point. In the context of constructing a portfolio for the long term, it makes tremendous sense to give adequate weightage to those stocks that are near their respective 52-w highs. The beauty of including higher number of such stocks in the portfolio is the ready availability of the 52-w high — low data which can be intelligently and timely used even by a retail investor.