Buying Winning Stocks Over Losing Stocks
Should you buy a stock at a 52-week high or a 52-week low?
Given the choice, would you be better off buying a stock from the 52-week high list or the 52-week low list? Financial publications and Web sites, such as Yahoo! Finance, publish a list of stocks every day that hit their 52-week high price and another list of those that sink to a 52-week low.
Assume that the only information you had was the two lists. One list showing stocks that hit new highs and the other of stocks that hit new lows. Which list would you pick from?
Buy Stocks Low
You could make an argument that, in the absence of other information, a selection from the 52-week low list makes as good of a guess as any. The company you randomly pick off the 52-week low list may be a great bargain—beaten up by an unappreciative market or caught in some regulatory squeeze that was about to end.
As a gamble, you could argue that a “bottomed out” company was more likely to go up and that a company at the top was to continue its upward momentum.
You could also make a good argument that the stock is at its 52-week high. So, the firm's management must be doing something right—it didn’t get there for no good reason. The chances that it will keep moving forward, even if it doesn’t follow an absolutely straight line, are good since the market clearly likes what it has seen so far.
This is a better guess than buying the stock off the 52-week low since there is nothing to suggest a stock in the dumpster is going to ever come out.
Price Direction Reality
The reality is that you consider many other factors in choosing a stock besides these two data points—if you even consider them at all. Here’s the point. Price direction is an important consideration in selecting stocks for evaluating.
It’s a very acceptable strategy to look for good stocks that have lost favor momentary with the market. That’s a completely different strategy from bottom fishing, which is where you’ll find most of the companies on the 52-week low list.
Do companies come off the 52-week low list and rally back for gains? Sure, they do, but a great many that find their names on that list languish or eventually disappear off the market. You will spend a great deal of time looking for the few that are going to survive and the fewer still that thrives.
Buy a Winner
Another strategy for finding stocks to evaluate is to look at the 52-week high list. But, hold on. Doesn’t that violate the rule against buying high? First, that rule only applies to stocks that have been artificially bid up by some type of market over-reach. You can find those on the 52-week high list, but they are easy to spot and eliminate. As an example, throw out the stock whose price has jumped 30% in one day.
You are looking for stocks that have shown steady growth over a long period to earn their way onto the list. When you identify these stocks, begin your evaluation. The market has done much of your work by rewarding the company with an escalating stock price, but don’t stop there.
Shopping for bargains is a fine investing strategy, but that doesn’t mean buying just on price. There is often a good reason that a stock is selling at or near its 52-week low.
Winners, especially in a down economic market, may be harder to find, but it’s easy to start your search at the top and eliminate any stocks that are there as a fluke. There is no rule that says a stock at its 52-week high can’t keep rising.