Serendipity at 52 week highs

I presented at Investors’ Carnival recently. The idea was Buying Stocks at 52 Week Highs. We have some of the slides here.

No one likes to buy at a high price. But price that’s going up can, at many times, indicate a fundamental change in the business that has been recognized by some early investors.

Yes, there are issues: You can have people manipulate stocks, and then, buying will hurt. But a strong fundamental check after a stock has hit a new high is a useful way to filter out the duds. Effectively, you can use a 52-week high as a discovery mechanism to find great fundamental stories.

Sometimes stocks move because of new buying. From promoters, who want more of their stock when it’s undervalued. From institutions who have just discovered the stock. From “informed” investors. Retail is usually the last to jump in, but the inexplicable early stock moves sometimes predate the fundamental changes.

And then there’s a time when stocks get added to passive indexes. When more money chases passive indexes, your bet might be simply on stocks that get big enough to get added to a well-funded index, and money automatically takes the stock higher.

And sometimes it’s a cyclical play. We talked about the HEG-Graphite play in the Electrode business. And truly, those stocks hit new highs over and over again – even though they are receding now, the stocks have a 2x to 5x return in a very short time.

Here are the slides, with examples:

There are some warning signs of manipulation though. Strong moves and then, a promoter sale, typically indicates froth that was created for the purpose of attention. Sudden press releases by the company justifying stock market moves is also a warning sign. And also, you have to track the cyclicals – the end of the cycle is often marred by disbelief, and such disbelief itself is a warning.

Overall, while many stocks are still overvalued (perhaps) there are still a few stocks that find themselves making new, record profits even as their stocks continue to skyrocket. Recently, Bajaj Finance was an example. We have to keep looking to find the next big deal.

Connect on twitter at @deepakshenoy for a discussion!

Now, tell them about it: