Buying Winning Stocks Over Losing Stocks

Given the choice, would you be better off buying a stock from the 52-week-high list or the 52-week-low list? Financial publications and websites such as Yahoo! Finance publish a list of stocks every day that hit their 52-week-high price, and another list of those that sink to a 52-week low.

Suppose the only information you had were those two lists: one showing stocks that hit new highs and the other of stocks that hit new lows. Which list would you pick from?

Buy Stocks Low

You could make an argument that, in the absence of other information, a selection from the 52-week low list makes as good of a guess as any. The company you randomly pick off the 52-week low list may be a great bargain—beaten up by an unappreciative market or caught in some regulatory squeeze that was about to end.

As a gamble, you could argue that a “bottomed out” company is more likely to go up and that a company at a high point cannot continue its upward momentum.

Buy Success

You could also make a good argument that if the stock is at its 52-week high, the firm's management must be doing something right—it didn’t get there without good reason. The chances that it will keep moving forward—even if it doesn’t follow an absolutely straight line—are good because the market clearly likes what it has seen so far.

This is a better guess than buying the stock off the 52-week low, since there is nothing to ensure that a stock in the dumpster is going to ever come out.

Price Direction Reality

The reality is that you consider many other factors in choosing a stock besides these two data points—if you even consider them at all. Price direction is an important consideration in selecting stocks for evaluating.

Looking for good stocks that have lost favor with the market is an acceptable strategy. It's also a completely different strategy from bottom fishing, which is where you’ll find most of the companies on the 52-week-low list.

Do companies come off the 52-week-low list and rally back for gains? Sure, they do, but many that find their names on that list languish or eventually disappear off the market. You will spend a great deal of time looking for the few that are going to survive and the fewer still that thrive.

Buy a Winner

Another strategy for finding stocks to evaluate is to look at the 52-week-high list. But hold on. Doesn’t that violate the rule against buying high?

That rule only applies to stocks that have been artificially inflated by some type of market manipulation. Look for those on the 52-week high list by reading about the companies you pick, and see whether their businesses and trajectories made sense to you. As an example, throw out a stock whose price has jumped 30% in one day, but even that one might have made some solid breakthroughs and kept going up. Find the story behind the increase and whether it is durable.

Look for stocks that have shown steady growth over a long period to earn their way onto the list. When you identify these stocks, begin your evaluation. The market has done much of your work by rewarding the company with an escalating stock price, but don’t stop there.

Conclusion

Shopping for bargains is a fine investing strategy, but that doesn’t mean buying just on price. There is often a good reason that a stock is selling at or near its 52-week low.

Winners, especially in a down economic market, may be harder to find, but it’s easy to start your search at the top and eliminate any stocks that are there as a fluke. There is no rule that says a stock at its 52-week high can’t keep rising.