If you are a value investor and short-term investing is an untouchable concept for you perhaps you will not find much interest in below post

As a traditional investor we don’t know pay attention to stocks hitting 52 weeks highs on a regular basis as they are considered to be hot stocks or tip stocks gamed by speculators. But ignoring such stocks in not a great idea if you are a practical investor

Imagine you were a retail investor and had seen Symphony Ltd mount back to back 52-week highs in Jan’14 . Due to the way we are programmed we would ignore such info and look for other bargains in the market

Have a look what happened in one year

sym-52

In last 365 days the stock has hit a new 52 week highs (the green dots) 67 times. Almost 1.25 times a week

What stops us from buying 52-week high stocks ?

Anchoring bias – The anchoring effect describes how we can be influenced, or “anchored,” on specific information, when stocks are at a 52-week high, this creates a psychological barrier of sorts, beyond which investors think the stock is unlikely to go. Investors discount the possibility that the stock will continue higher, which induces them to sell or at worst not participate in stocks journey to new life highs

Now before going ahead let’s understand

What causes some stocks to hit continuous weekly highs?

  • First time or renewed institutional interest creates liquidity in illiquid stock and the stock price zooms
  • Corporate event that could benefit shareholders , this doesn’t result in sustained and new 52-week highs
  • Consistent good performance of small cap company gets re rated in bull market
  • Gaming of a stock with no prior track record, again chances of this sustaining for 3-4 month period are minimal as the early starters would want to dump the stock after pumping it up

How you as an investor can benefit from stocks hitting 52-week highs ?

Last year I wrote on how Darvas used a similar technique to make millions in markets, you and me are not Darvas however we can get new investment opportunities (Core or Non core) by tracking companies making fresh highs

Monitor 52-week high data it takes 5 minutes – Use this link after market closing hours

Copy the data and start maintaining daily record in an excel

After saving data for 15 days, Start looking for companies making 52 weeks multiple times in the 15 day trading period

Limit down to Industries/ Sectors that you understand

See last five-year operating history to rule dud speculator driven companies (Bullet 4 above)

Value company on growth basis, You can use our tool to do so

If value of company is discount to growth measures pull the trigger, keep a hawkish stop-loss and enjoy the ride

Have a fantastic 2015 🙂

 

Feautured Image – thestreet.com