Avoid Stocks Hitting to 52-Week Lows
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
People love a bargain and so do I. As a matter of fact, I am a big sucker for them. Be it in apparel or food items, I love a bargain. But I have disciplined myself not to apply the same for the stock market, as it does not work. In the stock market, buying cheap-looking merchandise often fetches less than you paid.
A new share-price low flashes one of the clearest signs of danger. The company has fallen to a new low point in the eyes of the market. Chances are, something is seriously wrong. Such stocks usually head lower.
Each day, newspapers and Web sites whet our appetite for such dubious bargains by displaying the 52-week low for thousands of stocks. Why bother with such junky merchandise?
If a stock sinks to a 52-week low, that often marks the start of further declines. And stock market downtrends-like bad habits-are hard to break.
When it comes to share-price behavior, hunt for stocks moving toward new highs that boost high Relative Price Strength Ratings.
Time your buys as target stocks emerge from sound price bases. Be ready to sell if a stock falls more than 7% to 8% below your purchase price. Avoid stocks in downtrends, evidenced by low RS scores. For your stop losses you need to use your own judgment for each company. For example, the percentage of drop will be higher for internet stocks and lower for blue chips and different for small caps. Each stock is on its own merit.
Let me share with you old historical example several years ago 1997. Read below the story and decline of Reebok International shares. This should be very good learning experience for all of us and there are some other examples.
Reebok International shares demonstrate how chasing a stock making new lows can leave you in the dust. On Dec. 5, 1997, the athletic show maker’s stock sank on heavy volume to a 52-week low of 33 7/8.
As is often the case, a new price low often precedes bad news. Later in December, Reebok management warned of earnings trouble. When the company finally reported the October-December quarter, its per-share earning shrank 9% from year-ago levels. That marked Reebok’s first profit decline in four quarters.
At 33 7/8, the stock was marked down 55% from its February 1997 high, a tempting “bargain” to bottom fishers. But Reebok shares slid lower in each of the next
eight weeks of trade.
Reebok’s stock bottomed in January 1998 and recovered some ground. In May of that year, Chairman and CEO Paul Fireman told shareholders that the firm’s short-term prospects remained dim but stressed that Reebok’s new DMX shoe-cushioning technology “will drive our renaissance.”
Investors are still waiting for the rebirth. Reebok has seen profits shrink in six of the past seven quarters. In the other quarter, Reebok lost money. Reebok now trades just below 12, 78% off its February 1997 high. Rigorous statistical study bears out the Reebok example.
Consider the below three examples to prove the point. In the stock market the stocks hitting new highs will ultimately give better results. It has been proven over and over again.
One theoretical portfolio was rebalanced each year to stay in stocks with the best price performance in the preceding year. It yielded an average compound annual return of 14.3% and turned $10,000 into $4.1 million.
Another portfolio was indexed to the broad market. Its compound annual return of 13.2% turned $10,000 into $2.7 million.
The third rotated once a year into stocks with the worst prior-year performance. It produced a piddling annual return of 3.3%. That would have changed $10,000 into about $43,000.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)