It is hard to ignore stocks that scale 52-week highs or hit the lows as such movements are tracked on a daily basis. But the question here is: what importance does such a stock movement hold from an investor's perspective?
In this screening article, we discuss the 52-week investment plan. One of the relatively new entries in the investing rulebook, this strategy relies on the mantra, “buy high and sell higher.” Betting on a stock near its 52-week high has its own pitfalls as there is a possibility of it scaling higher or going downhill without forewarning.
While market analysts may be divided in their opinion regarding the 52-week high investment technique, many of them believe that 52-week high stocks which are still undervalued and have strong upside potential can be lucrative bets.
An Insight in to 52-Week High Stocks
Stocks near 52-week highs often instill the presumptive “adjustment and anchoring bias” in the minds of investors. This principle works on the belief that investors use the 52-week high price as a reference point and value stocks against this anchor.
Many a times, such stocks are prevented from scaling higher despite robust potential due to the psychological bias of investors who fear that the stocks are overvalued and a price crash is impending.
A few of the stocks remain undervalued due to prolonged under reaction on part of investors despite bullish growth drivers. Meanwhile, news pertaining to robust sales, surging profit levels, bullish earnings prospects and strategic acquisitions can drive the stock higher.
However, when a string of positive developments dominate the market, investors find their under-reaction unwarranted and the renewed interest might drive stocks beyond the 52-week high bar. Wall Street's fast paced trading makes it imperative for investors to step in before the market gets a whiff of it.
Also, recent academic research reveals that if a stock's current price is near its 52-week high, there are high chances that it will outperform peers in the subsequent period. According to researchers George and Hwang, holding 52-week high stocks for six months resulted in an average monthly gain of 0.45% between 1963 and 2001. Encouragingly, this is twice the gain that can be garnered from similar momentum-based strategies.
