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What to do with 52-week and all time high stock prices

iStock_000008155888XSmallDo you want to sell if a company if it reached a 52-week (one year), or all-time high? Let me ask the question the other way around. Do you hesitate to invest if a company is at its 52-week or all-time high?

 

You are not alone

If you do you are not alone. This is because market commentators use a lot of ratios and other metrics that give you an emotional response.

A company’s stock price reaching or exceeding a 52-week high is a good example. It is a widely reported, easily noticed (on a chart) statistic that you think is valuable information so you pay attention.

But psychological studies have shown that we wrongly place too much importance on facts that stand out, look important and are easily recalled.

 

A shark attack

A recent shark attack, for example, will lead you to overestimate the likelihood that you can be attacked by a shark.

Spoiler – it is more likely that you will be killed by lightning or an asteroid.

 

Back to the 52-week high

But how can a company’s stock price reaching a 52-week high make you do something wrong, you may be thinking?

In an interesting research paper called Psychological Barriers, Expectational Errors, and Underreaction to News Justin Birru (Ohio State University - Department of Finance) proved that shock prices are at a 52-week high,creates a psychological barrier beyond which investors think they are unlikely to go.

 

Price can’t go higher

Investors ignore the possibility that the stock price can go higher, which leads them to sell.

When a stock price reaches a 52-week high you may be telling yourself:

This stock price is up a lot. I must sell now because the price is high compared to where it has been over the past year and it may fall.

It is as if your mind only looks back over the past year from the current 52-week high but cannot imagine stock prices outside this 52-week period.

This may lead you to think it’s not possible that the stock prices may move outside these values (higher than the 52-week high) which leads you to sell your investment.

 

You ignore valuation

You are so focused on this 52-week high price barrier that you ignore other factors such as the company’s valuation.

This is also why you have doubts about buying a company, with its stock price at a 52-week high, recommended in the Quant Value newsletter. The newsletter investment model however does not know or care where the stock price is.

As long as the company is undervalued and its stock price is moving up (has positive momentum), it will recommend the company.

Getting back to the research paper.

 

Measuring pessimism

In the paper, to measure if investors really are pessimistic about a stock price increasing above its 52-week high, Justin looked at what happens when companies announce results.

 

The evidence

He found strong evidence that investors became overly pessimistic about the results of companies when its stock price was near a 52-week high, since they were very surprised by better than expected results.

When companies with their stock prices close to their 52-week high had positive earnings surprises (better than expected results) they had larger stock price increases compared to companies not close to their 52-week high.

 

How can this help you?

How can this information help you?

If one of your investments is close to a 52-week high you shouldn’t be worried. In fact, you should be glad, as it means the price most likely will go higher.

Also, if a newsletter recommendation is close to a 52-week high, or even all-time high, don’t hesitate to buy as the stock price has a big chance of going higher.

 

PS If you want to get investment recommendations based on a proven investment system click here.

PPS It is so easy to put things off why not sign up right now before it slips your mind?