Investment Opportunities in 52-Week High Stocks!

Markets when in uptrend invite lot of momentum investors to participate in the rally. Buying stocks that are close to their respective 52-week highs is a one-way momentum that investors identify as investing opportunities. But does this strategy always work? How does one use the 52-week high data effectively? Yogesh Supekar discusses the pros and cons of investing in stocks at 52-week high levels. 

Studying and analysing stock market data is one of the most important aspects of investing. Often enough, investors complain about the lack of data to make informed decisions. The data that can add value to investment decisions is not readily available, according to a majority of investors. Says Hitesh Oberoi, a new investor, “I opened a demat account in April 2021. I am a new investor in the market. My market app with the brokers provides me lot of data but honestly speaking, I do not understand most of the data that is flashed in the app. There is derivatives data, top gainers and top losers’ data, indices data and then there is data on price volume breakout and stocks that have hit the upper circuit.”

“While the derivatives data is absolutely foreign to me, the top gainers’ and losers’ data is something I find of no great use. The price volume breakout data is something I am still exploring on how best to use it as it is not very easy data to profit from. I find it easy to use the daily 52-week high data. I simply note down the stocks that have hit fresh 52-week high and then analyse the investment prospects. My logic is that if a stock is making fresh 52-week highs there must be something good happening in the company. By focusing on the set of 52-week high stocks I am able to focus on stocks that are trending and are promising to outperform the markets. It makes my investing life easier as I can focus on select stocks only and not worry about thousands of stocks that trade on the bourses,” he adds.

Indeed, any stock that hits a fresh 52-week high says a lot about its outperformance. However, is it enough to focus only on 52-week high stocks and not on other opportunities that may be equally attractive or even more so? Definitely not! Investing predominantly in those stocks that hit 52-week highs is a strategy that suits momentum investors. In momentum investing it is assumed that the stocks that have gained and are showing strength may continue to do so while the stocks that are showing weakness will continue to remain weak.

Defining Momentum Investing

Momentum investing means riding the high tide of an already raging sea. You know that the elevation is going to be fruitful even though risky. The basic concept of momentum investing is that short-term performance is repeated with winners continuing to be winners and losers continuing to be losers in the short run. A momentum investor buys the securities that are already soaring in price and showing an upward trend in the short-term (or long-term) and selling those that are underperforming in the short-term. It does not take into consideration the intrinsic value of the security, or the operating cycle of the business, or the type of sector the stock is in. It mostly focuses on the current trends in the market. It also mostly depends on the technical analysis of the behaviour of the stock. Hence, it goes against the very prominent strategy of ‘buy low, sell high’ strategy.

Trend lines, moving averages, stochastic oscillators are some of the popular technical analysis tools used in momentum investing. Momentum investing is mostly favoured by traders and risk-loving investors who want to make significant gains in the short term (less than 12 months). They remain invested until the stock is showing an upward movement. When the security starts underperforming these types of investors sell off and book losses immediately. Richard Driehaus was said to be the ‘Father of Momentum Investing’ – a successful fund manager in his time.

Advantages of Momentum Investing
• Mostly uses technical analysis and is proved to be quite efficient during the same.
• Investors’ emotions play a significant role in this type of investing and are equally effective in this strategy.
• Market volatility can be capitalised in a very efficient manner using this strategy. This strategy favours an extremely volatile market.
• Higher profit margins can be derived in short term by entering and exiting at the right time.

52-Week High Investing

When any stock makes a fresh 52-week high, it is noteworthy as the stock has reached its highest level in the past one year. However, it is important to note that when a stock makes a fresh 52-week high, several investors do tend to get trapped in low-quality stocks that hit this high. While investing in 52-week high stocks it is essential to not ignore the quality aspect of the stock. A stock belonging to A group or even B group making a 52-week high versus a stock belonging to XT group making a 52-week high cannot be viewed with a similar perspective.

Also, a stock that is breaking out of long consolidation can be viewed more positively than a stock that has given a breakout after a short consolidation. For example, if stocks like Vodafone Idea and DLF give a 52-week high breakout after a multi-year consolidation the impact of the share price can be larger. Longer the consolidation, larger is the movement in share price that can be expected. If a share is already in an uptrend and there is a fresh 52-week high with rising volume, the impact on share price can still be meaningful. In both cases, momentum investors can make decent profits in quick time.

Turnaround stories are also often very good breakout stories that are made more promising when such recovery stocks make a fresh 52-week high. Turnaround stories for beaten down stocks, if identified early enough in the recovery stage, may turn out to be multibaggers. CG Power is one such case. The shares of CG Power never looked back since it made a fresh 52-week high after recovering from its multi-year lows.

INTERVIEW

Rahul Sharma, Head - Technical and Derivatives Research, JM Financial Services Ltd.

Is it a good idea to buy 52-week high stocks?
Like all milestones, 52-week high is a key indicator of a stock’s performance especially when the entire equity market industry thinks and tracks returns based on an annual basis. Reaching a 52-week high for a stock is a testament to the underlying strength of the stock as well as an indication of the things to come for the existing trend. Conversely, if a stock fails to breakthrough its 52-week high, a significant pull-back can be expected. The two most important things that this marker can highlight are: a) visibility and b) FOMO.

Not only do 52-week highs create headlines but they also catch the attention of momentum traders and day traders. Many investment websites and trading systems have filters which highlight this data, thereby adding more social media attention. Those traders or investors who have missed participating in a particular stock may have the fear of losing out on an opportunity which in turn fuels more participation in the same.

How best to use the 52-week high information in trading and investing decisions?

Tracking relative performance can throw some interesting insights when comparing multiple stocks from the same sector or comparing a certain stock with the broader market index like Nifty or Sensex. For example, if stock A hits the 52-week high before stock B of the same sector doing identical businesses, one can look to add or trim positions based on this data. One also needs to check the recent technical setup of the stock if the targets of the previous price pattern have been achieved or not before making any investment decision. Generally, if a stock hits 52-week highs on expanding volumes, it can be a reliable indicator for momentum traders trying to make a quick entry and exit. Alternatively, if a stock hits 52-week highs on declining volumes it would mean that majority of the participants are not interested at higher levels and it may be a profit booking opportunity. One also needs to check the overall sectoral strength as one or two stocks going at 52-weeks high in an otherwise laggard sector may indicate caution. The ideal scenario to trade long on 52-week high stocks is good technical setup i.e. risk reward, expanding volumes and strong sectoral strength.

What is your outlook on markets? Where do you see outperformance coming from?

Nifty is expected to remain range-bound in December with resistances placed at 17,800 and 18,000 while downside supports are placed at 17,200 and 16,900. Structurally, this is still a bull market which saw a 10 per cent correction from the top in October and November. The correction at around 16,800 turned around to be a brilliant buying opportunity in December so far. Any bouts of volatility can be further used as adding opportunities.

A slightly event-based outlook means we could be headed for a pre-budget rally in January 2022 followed by a brief pause and then we can see Nifty testing 19,000-19,500 somewhere in February or March 2022. Sector-wise, we are bullish on banks, especially the heavyweights in Bank Nifty. PSEs could be in favour of bulls especially given the relative setup of Nifty PSE index with Nifty. Sugar is another sector where we could witness relative outperformance in the medium term.

Conclusion

52-week highs stocks can be special in many ways for both the long-term investors and the momentum investors. 52-week high stocks can act as best filters to identify opportunities in the market. Investing in 52-week high stocks after performing due diligence on the quality aspect of any company along with basic technical analysis can open a vista of opportunity for investors who seek active participation in the markets. Technical breakout at 52-week highs is a great entry point for many momentum investors. However, it is also identified that the 52-week high price point acts as a resistance level and as a reference point. There are several investors who prefer to sell shares when they trade close to 52-week highs.

Empirical evidence also suggests that volatility in stocks reduces when the stock price approaches a 52-week high. However, once the 52-week high price is breached, volatility increases. More volumes are also traded immediately after the 52-week high price is broken. Thus 52-week high price becomes important to monitor as volume increases, volatility increases and the 52-week high price point acts as a resistance. While choosing to invest in stocks at 52-week highs, it is important to notice the performance of the stocks in the same sector. If stocks from the same sector are simultaneously making fresh 52-week highs we can say that the momentum is strong and the uptrend may continue to last longer.

Some of the best examples of 52-week high investing were seen in the telecom and textile sectors. When both the textile and telecom sectors were rerated in recent months, we saw several stocks from the sector making fresh 52-week highs. Basic fundamental analysis and technical analysis is a must before investing in 52-week high stocks. Quality stocks which are witnessing buying interest near the 52-week high owing to some positive development can be perfect candidates for momentum investors.