Which do you buy? 52 weeks highs or 52 week lows?

Which do you buy? 52 weeks highs or 52 week lows?

For those of you who peruse the business section of the weekend newspapers, you may well have noticed the tables that reference stocks making new 52-week highs and 52-week lows. I often wonder which list piques the interest of investors, the 52-week highs, being the stocks that have traded at their highest level over the past year, or the 52-week lows, being the opposite, the stocks that have traded at their lowest level over the past year.

For those investors looking to allocate new money to the market, where should one’s focus lie? Should we scan the 52-week lows with the view that such stocks are likely to be considerably cheaper than at times over the previous year, thus offering good value?  Or alternatively, focus on the stocks performing strongly, and trading at their highest levels in 12 months?

We surveyed our database and found that 57% of our users think that focusing on 52-week lows is more beneficial while 43% of our users felt it is best to focus on the 52-week highs. 

Below, with the help of some hard data, we look to answer that question.

Before we get to that, just at look at the current lists. Using closing prices, the table below lists the stocks from the ASX100 that over the past week have traded at both new 52-week highs and 52-week lows. As shown, we have seen quite a few more new 52-week highs than lows over the past week. 

So how do we go about seeing which stocks make the most sense to buy? To do that, we need to test historical data. For this purpose, we have limited ourselves to just the ASX100 (including all historical and de-listed stocks) for the 15 years up until last Friday, being the 23rd February 2018. We have also included the effect of dividends received.

We will start with the 52-week lows. Our rules are fairly simple. If a stock closes at a new 52-week low, we will buy $10,000 worth the following day on market open. And then we will hold for 3 months, before again selling the stock the following day at market open. At this stage, we will assume we have unlimited capital, meaning we will take each and every trade that meets our criteria.

From our universe of ASX100 stocks, there have been 819 trades over the 15-year period, of which only 53% close higher after our 3-month holding period. On average, those profitable trades close 15.50% higher than our entry.

Now let’s try the stocks at 52-week highs. Again, we will buy $10,000 worth of each and every stock that closes at a new 52-week high, the following session on market open.

The first big difference is the number of trades, which comes in at 2037 over the same 15-year period. This is not that surprising considering that equity markets have an overall upwards bias. Of those trades, 64.7% are higher after our 3-month holding period, yielding an average return of 9.88%. So, while the percentage of trades closing in a profit is higher, the average size of those profits is less. The below table provides a summary of the above trade statistics.

To dig a little deeper, we need to test our rules in the context of a portfolio, where our capital is limited. So, lets run the same rules again, however this time, we will start with a portfolio of $1, 000,000, and allocate 10% of our capital to each new trade that comes along, compounding our profits as we go. Obviously, with the new capital constraint, our portfolio will not be able to take all the signals we initially generated. We will also add in brokerage of 0.1% to make things a little more realistic.

Again, starting with the stocks making 52-week lows.

Over the 15-year period, the number of trades is now limited to just 366, and by the end, our portfolio has ended at a value of $616,984, for a loss of 38.30%. This equates to annual return of -3.39%. Quite disappointing.

Now back to the stocks making 52-week highs.

In this instance, our portfolio is limited to just 509 trades, due to the fact we can only hold 10 stocks at any one time. After the 15-year period, the portfolio has increased in value to $5, 506,750, for a gain of 450.68%, which equates to 12.95% on an annualised basis. Not too bad! The below table provides a summary of the above portfolio statistics.

The difference between the portfolio returns is shown graphically in the chart below. In addition to the 52-week high (green) and 52-week low portfolio (orange), we have included the ASX100 accumulation index (blue) as a reference.

Relative Performance – 15 years to 23 Feb 2018

The data really speaks for itself. Investors should pay much more attention to those stocks that are trading strongly, relatively to the past year, as opposed to trading at suppressed prices. At least where a 3-month holding period is applicable. This simply highlights the market phenomenon of price trends, being that stocks trending upwards tend to consider doing so, while the same holds for stocks trending downwards. In other words, stock price trends tend to persist. So, if have are looking for new opportunities in the market, we would encourage you to seek out the 52-week highs, and leave the 52-week lows for others.    

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