Why Do We Struggle To Buy Shares At New 52 Week Highs?

9th Oct '15 by Ben Hobson

19 comments 22228 reads

Here’s a question. Suppose that a share you own just hit a 52-week high price. Does that make you nervous enough to sell and pocket the gains, or bullish enough to buy more? Let’s put that a different way. A share that you’ve been considering buying just hit a 52-week high. Do you buy it, or lose interest because you have missed out and it’s now likely overvalued?

Questions like these are part of the reason why the 52-week high is one of the most curious of all the factors connected with price momentum. On one hand, it’s a commonly quoted and memorable fact about a share. You can easily find lists of new highs in newspapers and financial websites anywhere in the world. Yet according to research, these snippets of price information can cause investors to behave irrationally - even though they might be completely unaware of it.

A short history of momentum

To understand the confusion caused by the 52-week high, it’s worth exploring how and why it fits into the broad church of momentum. Back in 1993, two finance academics, Narasimhan Jegadeesh and Sheridan Titman, propelled momentum into the limelight. Their research delivered the very simple finding that shares with extremely high or low recent returns often carry on the same trend for between three and 12 months. In other words, what goes up tends to keep going up. And what goes down… well, you get the idea.

In the decade following these findings, a great deal more research was done to pin down precisely what it is that drives the price momentum anomaly. One of those papers was produced by Thomas George and Chuan-Yang Hwang. They claimed that the 52-week high price explains a large portion of the profits from momentum investing.

Specifically, they showed that the 52-week high has very predictive qualities because investors use it as a reference point against which they decide the potential impact of new news about a share.

They found that when good news has already pushed a share price up to (or near to) a new 52 week high, investors go cold on bidding the price up any higher. That 52-week high acts like a brake on sentiment, even if the news about the share really does warrant a further rise in price. Over time,…

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Tom Firth

9th Oct '15

Thanks for that Ben, you make the case well for momentum strategies and the example you give is a good one. I've been thinking a lot about this kind of thing myself and have been trying to reconcile the momentum effect with the findings of De Bondt and Thaler in their paper 'Does the Stock Market Overreact?'

They certainly seem to agree to the presence of a momentum effect over the shorter term, but find that stocks that have performed well for 3 years tend to perform worse over the next 3 years and vice versa.

I'm trying to find the best way to protect yourself from this tendency while also taking advantage of the shorter term momentum effect. For example, if I buy a stock at a 52 week high, all that tells me is that the stock is at the highest point it has been in the last year, and gives no information about the couple of years before that. If, then, I were to blindly buy stocks at 52 week highs (not that you're suggesting this of course!), I run an increased risk of buying stocks that have already been going up for a few years, become overvalued, and are therefore more likely to underperform going forwards.

In your opinion, how is this best countered? By adding criteria to screen out stocks that have performed well for more than a certain amount of time? Or by ensuring that value criteria are also obeyed (ie, if a stock has gone up for 3 years but has not actually become overvalued, then theoretically it should be at less risk of underperformance)? Any thoughts from you or others would be much appreciated!

Tom

Mark Carter

I had been thinking about 52w highs and lows lately, especially with regards to my disastrous investment in Lonmin (LON:LMI). That was just a complete catalogue of schoolboy errors on my part.

I thought that a good way to approach things - but havent' tried to put it into practice - is to use a combo of 52w lows and highs. I think it would work particularly well with cyclicals and recovery plays, but poorly with quality defensive stocks, which are much easier to value.

Here's my basic idea: the problem with cyclical stocks like banks, housebuilders, and relevant today are miners/oilies, is that you never really know where the top and bottom is. This is the basic problem with value investing: you tend to catch falling knives, thinking you've got them cheap, only to find that things deteriorate much more. So look for 52w lows; something where the bottom has obviously fallen off a cliff, and are "obviously" cheap. Then put them on your watch list for 52w highs. When they reach their 52w highs, buy them.

The effect of this is to let a stock fall as much as it wants to. You catch it on the rebound, where there is strength.

It's psychologically difficult to do, because you are guaranteed to have missed the bottom, and you'll be thinking to yourself "it's recovered so much, how could it possibly go any higher". But as I found with Thomas Cook (LON:TCG), the move can be much more than anyone anticipates.

No guarantees, of course. But if I had sold Lonmin (LON:LMI) when it made its first 52w low (assuming I had it at the time), or just not invested, I would have saved myself a load of dough.

David Talbot

An interesting and informative article, Ben.

The antithesis of investing at "new highs" is investing at "new lows". Although the latter is an intuitively sensible strategy, there is considerable evidence that it a very unsuccessful one.

This is illustrated by the Stockopedia screens. Although ostensibly a long screen, the Walter Schloss "New Lows" screen is the worst performing long screen on Stockopedia since inception (annualised return -11.6%) , and even under performs all but one of the the short screens (James Montier Cooking the Books, annualised return -12.0%). Using the Walter Schloss screen as the basis of a shorting strategy would have been extremely successful.

On a complete different matter, another common belief is that dividend paying income stocks will outperform in falling markets, whilst growth stocks will underperform. During the recent market fall, the opposite has happened, as evidenced by the Stockopedia screens. Any thoughts?

Rusty2

Not sure about this strategy myself, I tend to look for value in quality companies, so if they fall to 52 week low then when they seem to be going up I buy. If you look at one I used to hold Clarkson (LON:CKN) you can see it can work, I bought around 1900p and sold at over 2800p, if you had applied your theory, you would have bought around 2500p and now would be about 10% down? Another one I bought Ashtead (LON:AHT) at 830p and sold at 1170p, you would have bought at 1200p and now would be down 15%? Vislink (LON:VLK) is similar also. I agree about finding the bottom but waiting for 52 high again is too late for me. Also when would you buy Xaar (LON:XAR) as 52 low was 1 year ago and its been steadily climbing from 227p to 550p, looks like 28/8/15 at 500p? You quote Thomas Cook (LON:TCG) but you would not have bought until about 135p? So you will be down now? Solid State (LON:SOLI) is another I hold, low was 600p and 52 high around 870p, again you will be down about 17%. I'm sure there are many companies that have gone on and done well but from my experience buying low has worked for me.

Edward Croft

Yes I've never liked the Schloss screen as momentum (positive or negative) tends to persist over 6 months to 1 year periods. The best lookback for picking loser stocks is over 3 to 5 years. There is evidence that momentum reverses over that timeframe - mean reversion tends to kick in after long periods of either falls or rises. Long term momentum reversal is highly correlated with the value effect.

Lots of people look at the 1 year low list for finding good 'value' shares... but I think it's a losing play - you just can't fight momentum at the portfolio level. Better to put one's capital in higher probability plays.

Regarding dividend stocks. The reversals are probably due to the fact that dividend shares have become overcrowded and popular as a trade. High yielding stocks are more expensive than they've been in years and there's evidence that low volatility shares are also more expensive than they've been in years ( see recent FT article ) ... when things get trendy reversals happen.

Super piece @Ben.

Yes I agree that screen is not good for long maybe for short selling, its full of poor companies like Polo. But I'm referring companies like Clarkson (LON:CKN), I looked back at the Stockreport when the shares were 1900p: http://reports.stockopedia.co.uk/1079930/gb/Clarkson_LSE_1079930_20150108.pdf

As you can see the QR is 95, VR 61, MR 47, SR 81.

Ashtead (LON:AHT) and Vislink (LON:VLK) were also ranked over 80 when shares were low.

Xaar (LON:XAR) only had a SR of 63 but QR was 92 : http://reports.stockopedia.co.uk/1079717/gb/Xaar_LSE_1079717_20141004.pdf

So really you can pick up quality companies at reasonable price. I think some of the value screens bears that out. Be interesting if you could do a screen for 52 week lows but SR over 80? Or QR over 90?

lightningtiger

I have always used the trend as your friend attitude when the share is consistently rising. As long as it keeps going above the MA, be it 20, 50 or 200 day and does not hit the stop loss, fine.
DART was the first share that I purchased with Stockopedia when I first bought the program a few years ago. Interestingly I have recently bought Gamma who are in Newbury near me. I was wandering why the share was beginning to gain momentum & further digging found it was in the list of the top 100 companies in the UK for the last three years by The Sunday Times.They are also gaining new staff to get more customers,more customers,more money.
There is usually a good reason why the momentum continues, the trick is to find out why.
It seems as if the company is doing well consistently doing things right, then the share price will rise.accordingly.
The other thing I like to compare is the rate of momentum.
An example here is Victoria comparing with say DART. Over the last 52 weeks Victoria has come out a better return consistently, there is that word again. These two companies are of course from two different sectors.
I do check back at least 3 years if possible to see if the general trend has been up.
Sometimes the trend reverses, and continues up for 3 or 6 months and still looks good like OPAY has done.
Another thing to consider is the true valuation, which most people look for anyway.
With Stockopedia it is nice and quick to check a sector out and find the best stock in the sector and see how far it is off of the 52 week high, or is making another new high.

iwright7

10th Oct '15

Ben,

Very good article putting the case for the power of momentum/trend following. Whilst it may be counter intuitive the 52 Week High momentum effect is proven to what we all want to do, which is to beat the market. Rather than avoid such market anomalies which make us feel uneasy I have come round to the view that I should seek them out as positive reason to buy. Better still when a few anomalies such as a 52 Week High, come together in the same share, at the same time. Ian

Ramridge

Excellent article, Ben.
I confess that I have a mental barrier when I look at 52-highs. My head says it is only an artificial number; it could be 60 or 40 and it wouldn't bother my judgement. But then a little voice in me says 'don't buy. The downside risk is much larger than the upside. This is bound to fall.' The irrational part normally wins.
So now I force myself to reconsider the fundamentals and in particular the strength of the management. As Edward Roskill said, good management will continue to find ways to add shareholder value, albeit the share price has shot up and is causing nose bleed.
Regards. Ram

I confess I'm reluctant to but shares if the price has gone up a lot already, I'm more of a value investor. The 52 week high investment does work, 15% over last 3.75 years is not bad. But there are other screens that outperform it like Jim Slater is up about 135% in same period with 25% pa UK return. The GARP screen has done even better with nearly 27% returns. The problem I have with the 52 week high is a lot of the growth has already happened and as I showed with some of my investment like Clarkson (LON:CKN), and Ashtead (LON:AHT) soon after hitting 52 high the price has fallen quite considerably or Xaar (LON:XAR) where you would be buying in after the sp has gone up 120%. Another one I currently hold is iomart (LON:IOM), I bought at 170p (thanks Naked Trader) back in January 2015, now I see this has just been added to the 52 week high screen, now it will be interesting to see what happens, I'm considering selling if it goes above 300p, because Ive made my profit of about 75% in a year, I think the only reason it will go much higher is a take over. Having said that that 52 week high clearly works for some shares like Dart (LON:DTG), Character (LON:CCT), Next (LON:NXT), shares that always seem to be going up in price. Although Dart (LON:DTG) have fallen back this week.

Bearbull

11th Oct '15

Thank you Ben for the article
@herbie47
Controlling my value and momentum strategy over a lookback period of 10 years I checked whether the result improves if I take away those shares of my pre-final selection with a twelve-month performance of above 70%. The result was negative. Even with shares that have gone up 140% in twelve month I would have been better off to keep them in the portfolio. These shares regularly performed another 100% the next twelve month (in a still ongoing bull-market). Once momentum really takes of "funymentals" (like Ed Seykota calls them) do not matter anymore.

snorkel

Thanks Ben for an interesting article, the illustrated stock is a company I have invested in for quite a long period so have experienced many 52 week highs in it's rise to 5 pounds.
So at what point do we buy or sell ? Whilst there are many attempts to provide a mathematical method of initiating or closing positions, these only act as a guide to identify a stock that may or may not be worth investing in. The key remains understanding the basic fundamentals of any company and this comes in many shapes and guises, so using DTG as an illustration, I was drawn to this article and have subsequently signed up to write this post for what its worth.
Like your article states I have found myself taking a step back to re think my current position especially since the stock has given back 10% in the last handful of days and that coming after an announcement that should have put the stock up another leg in my mind. So I reverted back to forgetting the current price and reviewing the fundamentals of the stock ignoring and commentary noise.
-reported a 60% increase on YoY 6 month profits so can assume compared to the 89 mill reported for the same period last year we are expecting numbers in excess of 142mil for this period.
-DTG has a track record of conservative guidance so would expect slight upside on this number.
- Dart will now be entering it's unprofitable period for the next 6 months so using last years losses at 32mil, guidance has been given that winter bookings are on track with managements expectations.
-Also, at some point I'm expecting some of the previous right down for the court case vs Hazar to be written back as 17 mill seems a pretty conservative write down.
- There holiday business whilst having grown significantly over the last 3 years to the 3rd largest in the UK is still a lot smaller than say Thomas Cook.
- upgrading most of the current fleet suggests that further growth over the next 3-5 years is anticipated, purchase of which is going to be made with some debt and through increased cash flow and saved maintaince and fuel costs, protecting current shareholders from any dilution.
-Holiday margins are less effected by increase fuel cost if oil was to rise significantly

So, as this stock hit it's 52 week high this week and now with a market cap today of 653mil based on a closing price of 4.46. This could represent a P/E of approx. 6 based on forward 2016 numbers. Should DTG be a sell, hold or even a further buy ?

Might be worth comparing with Thomas Cook also hitting a high mid year and comparing prospects considering TC has been unprofitable for best part of 5 years with significant debt on it's B/S

My conclusion after removing my emotions is there may be even 10 pound in this stock over the next 3 years and accumulated further positions during this pull back.

Andrew L

13th Oct '15

Ben, Is it possible to get a list of the new 52-week highs and lows for UK shares in stockopedia? Also maybe a list of the first time 52-week highs for particular shares (i.e. first time in the 52-week period that they have seen a new 52-week high.

Thanks

Jardine

The new 52 week high and low listings are already available on Stockopedia under TOOLS > CHART SIGNALS then New Highs of New Lows.

hayashi22

14th Oct '15

Yes I have easily found them. But who would have thought to look there!?

Ben Hobson

Hey Tom,

Sorry for the delayed reply. One of the interesting things from the original 52-week highs research was that they found that these stocks didn't have typical 'price momentum' traits. In other words, they didn't suffer the same medium/longer term reversals that had been found in other momentum strategies. They reckoned this was because 52-week highs prompt a very specific behavioural reaction (anchor and adjust).

I think your point about the value criteria is right. Value and momentum are like yin and yang, but there's an argument that after a prolonged period of strong momentum ignoring value altogether could risk leading you into expensive stocks. It could be worth considering other momentum indicators like earnings upgrades and surprises <--- is the stock consistently defying expectations? That might be something to look at (these are also components of the Momentum Rank).

Cheers, Ben

Hi Ian,

Absolutely. I think the really interesting thing about momentum is the deep roots it has in investor behaviour. On the subject of feeling uneasy, our tracking of strong momentum / attractive value stocks (VM Rank) has been really strong over the past couple of years or so. There are hedge funds that essentially apply the same rules and do well out of it. But I still find myself looking at high VM shares and thinking: 'hmm' or 'ugh'! (which is a fail on my part and which, I guess, is why these anomalies are shown to work!).

Ben

Hey Ram,

Thank you.

Yep, I'm with you on that. If you can find a good management team then that is a real plus. Although that reminds me of a Buffett quote: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

We need to introduce some sort of management rank !!

Ben

Hi snorkel,

Thanks so much for detailing your thought process, it's really interesting to hear. I'm not an expert on Dart, and as you say there has been a lot of commentary about it. But one of the things that strikes me from an investment perspective is that I think I'd prefer to be aligned with where Dart has positioned itself in the market, as opposed to Thomas Cook. They may be able to turn TC around, but is it really going to be competitive, especially with all those shops? I really have no idea.

I guess the problem with airlines is the multitude of moving parts and things that can go wrong (in the industry, not with the planes!) There have always been these questions about Dart - oil prices / hedging arrangements, upfront customer payments, buying new aircraft etc, etc - I think that's perhaps been quite a big influence on the momentum. You get these nagging doubts... is it a problem?... should we be worrying?... and then it beats expectations which forces a group rethink on where the price is. So it's definitely an interesting case.

Ben

Why do we struggle to buy shares at new 52 week highs?

A short history of momentum

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Ben Hobson

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