Investing In 52-Week Low Stocks: A Strategy To Beat The Market!
The 52-week high-low data is among the most tracked by the investors. Shohini Nath and DSIJ Research Team find out whether any strategy can be devised around such interesting market data
The 52-week high-low data is considered as the most useful market data by many investors. Indeed, when a stock is near or at its 52-week high, it talks a lot about the company and what investors are expecting about the stock. Similarly, stocks that are at or near their respective 52-week lows signal that the company is facing some issues in its business due to which investors are not willing to bet on the company's future prospects.
What is 52-w high-low?
The stock prices are volatile and fluctuate frequently, recording highest and lowest figures at various points of time in the market. The 52-w high-low is nothing but the highest and lowest price of the security over the period of past 52 weeks.
While experts would argue that any investment in equity should be done after studying the fundamentals, financial strength of the company, profitability, industry outlook and other efficiency and operational parameters, most of the investors cannot resist basing their investment decision on 52-w high-low data. We attempted to understand how 52-w high stocks performed versus 52-w low stocks. We observed how the stocks that touched their respective 52-w highs and 52-w lows in August 2014 performed 1 year, 2 years and 3 years down the line. 
The average returns for the stocks that touched their respective 52-highs in August 2014 were -20.56 after one year, -8.13 per cent after 2 years and -2.65 per cent after 3 years.
If we focus on the stock data for August 2014, we find that the average performance of stocks that touched 52-w lows in August 2014 was as follows: one-year 62.58 per cent, 2 years 66.06 per cent and 3 years 68.85 per cent. It will be interesting to see if this observation is valid across different periods. 
If we look at the data for the three-month period across three years, viz., 2014, 2015 and 2016, we observe the following:
Clearly the data suggests that stocks that have touched their respective 52-w lows in June, July and August of 2014, 2015 and 2016 have delivered better returns when compared to the stocks that have touched their respective 52-w highs during similar period.
Soumen Chatterjee
Guiness Securities
Arithmetically, 52-week high or 52-week low does not necessarily have any distinctive value, but it holds a special psychological importance in the minds of traders or investors, which has intense impact and greatly influences their buying and selling behaviour. From the point of view of trading also, 52-week high-low levels play an important factor for traders in determining a stock's current value and predicting its future price direction. Traders use 52-week high/low figures to decide an entry or exit point. Traders buy a stock when its price exceeds 52-week high and sell when the price falls below its 52-week low. The logic behind this approach is that if price breaks out from the 52-week range (either above or below), there is enough velocity to continue the price movement in the same direction. Regardless of the trading approach or strategy, the 52-week high/low figures have been transformed into important cornerstone points in the minds of many investors and have significant effects over their trading behaviour
Conclusion:
While determining the intrinsic value and the margin of safety is crucial for making the right investment decision, we find that applying the stock selection parameters on stocks that have either touched 52-w lows or are near their respective 52-w lows may provide investors with an opportunity to beat the markets. The data highlighted clearly suggest the merits of focusing on stocks touching their 52-week lows for long term investing. The bottom-up approach in stock investing can be applied on the set of stocks that have touched their 52-w lows or are near their respective 52-w lows. Investors will be making a grave error if they are purely focusing on the 52-w high/low data for selection of investments, ignoring all the other important parameters. What we are saying here is that investors ought to apply all the stock selection filters on stocks that are either at their 52-w lows or are near 52-w lows and let such a portfolio grow. The focus should be on fundamentals and valuations and not only on the price. However, a set of 52-w low stocks can help investors identify value buying opportunities. 
The trick is to identify companies that are growing consistently and are financially strong and have healthy balance sheets and yet are trading at 52-w lows.