The following opinion feature is by Rufus Mwanyasi, an investment analyst.
Every business day, financial journals publish lists of stocks whose prices have attained new 52-week lows. Many investors approach such a list with caution, assuming that the stock prices are fundamentally weak.
Often, the herd mentality of the investors compels them to dump stocks hovering around their year lows. However, the rationale that goes against this view is that stocks might have tumbled in the past due to varied reasons, be it company-specific or macroeconomic issue.
For an equity investor in search of a bargain, the best place to find stocks with potential is the 52-week low charts, especially in the current market.
Investors should consider these stocks before dismissing them. It makes perfect sense to analyse their worth as low-valued stocks could actually make a great buy.
During the past three years, investing in 10 stocks at or closest to their 52-week lows has proven a profitable one.
Simply picking these stocks at the end of the each year and holding them for the next 12 months beat the index by a substantial margin overall and in two of the three years.
Starting in 2012, if one had bought 100 shares in stocks at or near their 52-week lows, the strategy earned a whopping 78.7 per cent return in the following 12 months while the NSE 20 share index returned 19.2 per cent. In 2014 and 2015, the same strategy returned 0.39 per cent and 41 per cent respectively while in both instances, the overall market returned 3.19 per cent and 21 per cent respectively.
Stated differently, the strategy had a cumulative return of 152.9 per cent while the NSE 20 share had -2.95 per cent in the past three years.
I am not one to quickly recommend any particular strategy especially when it is s based on short-term data. Nonetheless, there is obviously a strong pattern that is worth noting.
An end-year analysis of stocks with the widest gap to their 52-week highs for 2015 shows a list of big names such as ARM Cement, Pan Africa Insurance and British American.
All these have been top favourites of the investor community at one point. Of course, investors would be tempted to write off these stocks but they should consider that a bad run may not mean the end of the road.
Low valuations do not always mean that the stock has lost all potential. Other names in this list include Transcentury, Housing Finance, Longhorn, Mumias Sugar and Crown Berger.
Having said that, for the next 12 months, time will tell whether this strategy remains robust. It is possible that some of these names would give good returns. I repeat this caveat: 52-week low do not mean the stock has bottomed out.
Individual stocks could still fall due to company specific issues or the general market sentiment. Patterns do not hold forever.
Therefore, the investor should figure out where the stock is headed by digging into the company’s profitability, operational efficiency and cash flow before making the final decision.
