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Of all the many investing strategies for market success few have the puzzling quality of Buy High, Sell Higher.  Newcomers to retail investing read time and again that the way to make money in the market is to buy low, and sell high.  They read of history’s great value investors avoiding shares reaching 52 week rolling highs in share price, believing many to be overpriced.

So they ignore daily tracking of the 52 Week Rolling High lists and focus instead on the 52 Week Rolling Low lists, in the hopes of sniffing out great bargains.  Some believe in the twin bromides what goes up must come down, and what goes down must come up.  They are firm in their belief that shares reaching new 52 week highs must come down, and shares of solid companies reaching 52 week lows must come up.  

Neither observation is completely valid when it comes to share market investing.  The road to financial ruin is littered with the bodies of beaten investors who learned to their horror that in all too many cases, what goes down can keep going down.  Growth investors like to cite the US-based research showing the strategy of buying stocks approaching or reaching new 52 week highs outperforms the overall market.

While this research may have some validity to it, retail investors ignore a basic fact about all of these research efforts on share market investing strategies at their peril.  The fact about which you should know is sample size.  Typically these studies include thousands of stocks in their research, a feat no retail investor could ever hope to match.

However, there are solid reasons to go against the grain of common sense and research 52 Week High lists for investing targets.  Simply put, 52 week highs are usually – but not always – part of an upward trend indicating share market participants increasing willingness to pay what might appear to be a premium price.  In short, 52 week highs in an upward trend are generally a sign of strength and a reasonable indication the price could continue higher.  You can then truly Buy High and Sell Higher.

As you should know, sound investing strategies of all types require more than one indicator.  Regardless of whether you pore over the 52 Week Low list hunting for bargains or the 52 Week High list looking for the chance to Buy High and Sell Higher, you will want to look at some other things.

Let us use as an example of the downside of relying on a single indicator a share that reached a new 52 week high on 16 January 2012 – the first trading day of a new week.  The share is APK (Australian Power and Gas Company).  On Friday 13 January it closed at .49 and rose almost 30% on the 16th to close at .62.

The following one month share price movement chart shows the unhappy aftermath:

 

Chart: Share price over the month

While a 52 week high is itself considered a technical indicator, there are other things investors need to consider and among them the most important is the trend.  One day does not a trend make, as this chart for Australian Power and Gas clearly shows.  

The risk in buying high is jumping on a share whose price has shot up for reasons not always obvious or sound.  Investors who cruise the 52 Week High list for opportunities have a rule of thumb of watching out for a 30% rise in a single day, as happened with APK.  According to this strategy, that kind of rise is usually a sign of some form of artificial inflation.

Good growth shares with sound future prospects should keep moving up, although not always in a straight line.  That’s the theory behind the strategy and there is research that says in general when a share is at a new high the chances of it continuing to move higher are greater than for shares trading sideways.

Another quick rule of thumb is the 45 degree angle chart.  Shares in a gradually upward trending slope will look roughly like a 45 degree rise on their price movement charts.  Here is a trending chart of another share that has recently been hitting new 52 week highs, Drill Search Energy (DLS):  

The chart points to DLS as a good potential investment target, but how does one find shares like this in the first place?  Take the time to study the daily 52 Week High lists you find on websites like TheBull for at least a week.  We reviewed the lists for the trading week beginning 16 January 2012 and ending on 24 January 2012.  What we were looking for was shares with multiple appearances on these lists, indicating repeated new highs.  The following table shows all shares over that 7 day trading period that made the daily list at least 3 times:

CompanyCodeMarket CapNew 52 Wk Highs3 Month Avg VolCurrent Share Price
Alliance AviationAQZ176.85M16/18/19/20/23/24135,6991.97
Corum GroupCOO13.30M16/17/20/23/24131,0290.06
Corizon ResourcesCZR36.3616/23/24210,9140.08
Drill Search EnergyDLS305.18M16/17/18/19/232,200,3601
Energy ActEAX42.6116/17/2416,7801.7
Excelsior GoldEXG33.67M16/17/20/23526,2700.06
James HardieJHX3.20B18/23/241,766,3207.35
Matrix MetalsMRX678,30K16/17/18/19/106,1690.04

 

Before we highlight the most interesting finds on this list, we need to make a few general observations.  First, as you may know, it doesn’t take much to move the share price of a small cap with low trading volume.  You have heard the phrase Big Companies Don’t Make Big Moves and you can see there is only one large cap share on the list – James Hardie.  

Because of this it is common to find these lists dominated by shares with lower share price.  Half of the companies listed are trading under 10 cents a share and only 1 trades above $5..  This is not to say they are not good targets simply because they are small; only that they are higher risk.

With that in mind, let’s take a deeper look at the three shares with market caps of at least 100 million.  We will begin with the one with the most intriguing story: Alliance Aviation.

Alliance Aviation (AQZ)

As you might expect from the company name AQZ is in the Transportation group of the GICS classification system.  In reality, they are a mining and energy services provider, with their principal service being flying mining and energy executives, engineers, and assorted personnel to even the most remote corners of Australia.  They also have a commercial charter operation serving Government and other corporate customers.  Their current fleet includes 25 aircraft with locations in Brisbane, Townsville, Cairns, Adelaide, Melbourne and Perth.

In the 7 day trading period we analysed they reached 6 new 52 week highs.  Here is their share price movement chart:

You won’t find any analyst coverage of AQZ as yet and there are no numbers to review as this company went public in December 2011.  As often happens with initial public offerings, the shares dipped a bit after a few days of trading and then they began their upward climb.  How can the average retail investor make any kind of assessment of whether this is a growth share that will keep moving upward or one artificially inflated as a new offering?

The first way is to consider the growth prospects of the industries they serve.  The mining boom is expected to continue, although some say at a slower pace.  And the LNG (Liquefied Natural Gas) projects underway in Australia paint a bright future for Australia’s energy explorers and producers.  

The second way is to examine the big investors who bought into the company.  Here is a list of large investors who bought at the offering:

•    Perpetual Limited, 6,054,856 Shares, 6.74% Voting Interest

•    Australia/New Zealand Bank, 5,162,500 Shares, 5.74% Voting Interest

•    Commonwealth Bank of Australia, 10,625,000 Shares, 11.81% Voting Interest

•    UBS Global Asset Management, 5,162,500 Shares, 5.74% Voting Interest

Although AQZ at this point could be considered a higher risk speculative play, should you invest you would be in good company.

Drill Search Energy (DLS) and James Hardie (JHX)

Investors who prefer companies with some history can look to DLS and JHX.  Here is a chart of their three month share price movement:

This chart serves as a lesson in how to best analyse a share with price movement charts.  When you compare two shares with one having a higher percentage upward movement, the share with the smaller percentage appears to be a less than stellar candidate for a high growth share that might keep on growing.  The fact that JHX does not appear to have the desired 45 degree upward angle is an artifact of the comparison.  Here is a chart for JHX in isolation:

 While JHX has shown more price volatility along the way, this three month period shows the desired upward trending pattern.  Both DLS and JHX are worthy of consideration.

Drill Search Energy (DLS) is an oil and gas explorer and producer well positioned for continued growth.  Although they operate in four business segments – New Oil, Wet Gas, Mature Oil, and Unconventional – the growth will come from the gas segments in the Cooper Basin.  The coming of LNG processing facilities – both ashore and floating in the sea (FLNG) will need natural gas in abundance.  In addition, DLS is poised to tap into the potential of shale gas formations in the basin.

James Hardie (JHX) makes a variety of commercial and residential products from fiber cement.  Although their diversified product offerings give them a significant competitive advantage, their business in the United States has suffered due to the collapse of new housing construction there.  Their P/E ratio 56.8 screams growth, the P/EG of a mere .98 shouts reasonable price.  

On 11 January 2012 US based Zacks Investment Research upgraded the shares to Outperform from a previous Neutral rating.  With increasing optimism about the state of the US economic recovery, JHX may continue its upward momentum. (Meanwhile Credit Suisse has JHX as Underperform in this week’s “Sells and Downgrades”).

If your investing soul is deeply ingrained with the mantra of buy low and sell high, here is something to think about.  

American investor Philip Fisher, whom some consider to be the father of growth investing offers us this observation: “Every significant price move of any individual common stock in relation to stocks as a whole occurs as a result of a changed appraisal of that stock by the financial community. 52 Week Rolling Highs tell us the financial community thinks better things are still to come.”

 

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