Naturally. But much easier said than done.
IN THIS PACKAGE
- Buying stocks at 52-week highs can pay off
- It's not too late to open an IRA, and save for life
- Many workers wasting chance that 401(k) gives
- Adding annuity to portfolio can pay off, study find
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- Tamer IPO market may offer investors shot at better deals
- The week ahead
Jan. 13: Mending your 401(k)
Jan. 6: Family needs drastic steps to dig out of debt
- Companies and Corporations
- Earnings Forecasts
See more topics »
Simpler, even if it goes against the conventional wisdom. But sometimes, with a little care, it can be profitable. Some experts see evidence that stocks reaching 52-week highs aren't necessarily primed for a fall, and, in fact, often continue to advance in the following months.
Analysts caution that willy-nilly buying of shares at 52-week highs isn't a smart idea. But with some research into company fundamentals, careful selection of stocks can pay off.
Investor attitudes are at the heart of this phenomenon, research suggests. Experts say investors often are reluctant to buy shares in companies that have run up and maintain a predetermined view of the stock's value, so even positive developments may not be enough to send shares higher, at least at first.
"Traders appear to use the 52-week high as a reference point against which they evaluate the potential impact of news.
When good news has pushed a stock's price near or to a new 52-week high, traders are reluctant to bid the price of the stock higher, even if the information warrants it," write professors Thomas George of the University of Houston and Chuan-Yang Hwang of Hong Kong University in a study on the issue published in the Journal of Finance.
"The information eventually prevails, and the price moves up."
A Chicago Tribune study of U.S. companies whose shares recently hit 52-week highs suggests that such stocks frequently do better than the broader market.
Of 256 firms whose common shares hit 52-week highs on the New York Stock Exchange during a week in mid-January, slightly more than half outperformed a mainly flat Standard & Poor's 500 index through the end of the first quarter. The superior performance was driven by mid-cap shares.
Some of the increases during the nine-week period were pronounced: About 10 percent jumped more than 15 percent despite the market volatility during that time.
Buying low, conversely, can be a dicey proposition, the Tribune study found. Of the 20 stocks that hit 52-week lows during the January week, nearly half underperformed the S&P 500 through the end of the quarter.
For investors, selecting the right stocks is the tricky part.
Greg Forsythe, senior vice president of Schwab Equity Ratings at Charles Schwab Corp., said investors need to look for companies that are growing earnings, generating positive free-cash flow and producing earnings above consensus forecasts over recent quarters.
"If I saw that, I wouldn't hesitate to consider the stock, even if it's at its high," he said. "This is a company that's healthy and growing in terms of its basic fundamentals. Fundamental strength is a sustainable driver behind price momentum."
Valuations can be an important component of subsequent stock performance. In the Tribune study, nearly 60 percent of companies with a trailing price-earnings ratio above 30 at the time of their 52-week high underperformed the S&P 500.
Conversely, 56 percent of those with P-Es under 15 outperformed the index.
The study found similar results with the 52-week lows: Half of those with P-Es over 15 underperformed the index, while 75 percent of those with P-Es under 15 outperformed the index.