Most investors, professional and novice alike, get excited when popular stocks are hovering around their 52 week lows. While we know this is the relativity bias at play (the 52 week low price when compared to the 52 week high price of the share), it becomes extremely difficult for most investors to ignore the 52 week low as a viable buying signals on the basis of the stock being “undervalued” by the market players.
There has been good research on the subject and one of the more popular books on the subject, available on Amazon, is the The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion by Luke Wiley and Lesley Grey
In this post, we shall examine by backtesting data to see if the charm of buying stocks at 52-week lows is a viable and sustainable stock picking strategy over a medium to long term horizon in relation to a systematic investment plan (SIP) strategy
Back-testing the buy stocks at 52 Week Low Strategy
Step 1 : Picking a sample of 20 stocks
We want to stay away from risky and volatile stocks so we shall keep this experiment within the top 200 stocks in the Indian stock exchanges. To randomize which stocks will constitute this experiment, I have selected every 10th stock in the NSE 200 Index at the time of writing this article (03.11.2019) starting from the 10th ranked company i.e. State Bank of India.
A second criteria has been added that the stock should have been listed for atleast 10 years for us to derive value from the experiment
The 20 companies that will form part of this experiment are –
- 10th ranked – State Bank of India
- 20th – Nestle India
- 30th – Sun Pharmaceuticals
- 40th – Tech Mahindra
50th – ICICI Lombard General Insurance (removed as less than 10 years)
- 51st – Vedanta Limited
- 60th – Hindustan Petroleum Corporation Limited
- 70th – Petronet LNG
- 80th – IDBI Bank
90th – Larsen & Toubro Infotech Limited
- 91st – ACC
- 100th – Page Industries
- 110th – Voltas Limited
- 120th – Sun TV Network
- 130th – Tata Global Beverages Limited
- 140th – Federal Bank
150th – Endurance Technologies (removed as less than 10 years)
- 151st – City Union Bank
160th – Syngene International 161st – RBL Bank
- 162nd – IPCA Laboratories
- 170th – Amara Raja Batteries
180th – Mahanagar Gas Limited
- 181st – Edelweiss Financial Services Limited
190th – Quess Corp Limited
- 191st – Oriental Bank of Commerce
- 200th – HEG Limited
A look at this list got me curious that if I have bought 1 stock of each of the above 20 stocks in November 2009 (10 years back), then how much would that have cost me?
The answer to that is a miserly ₹6,790 is all it would have taken to buy 1 share of all the above 20 companies.
And if you are thinking what those 20 stock units will be worth in 2019 .. it would summate to a humongous ₹49,195 which would have given us a CAGR of 21.9%
But then you should have also have been very very lucky to have chosen two stocks in particular in this list i.e. Nestle India and Page Industries – as these two stocks together contributed to more than 80% to the profits that this small 20-stock portfolio has given.
Step 2 : Collecting the Stock’s Monthly Closing Price
I could have also taken the daily closing price of each of these 20 stocks but that would have been too many data points which would have only complicated matters. So I went on to pick the closing price of each stock on the last day of the month starting from November 2009 to October 2019.
Now since I need atleast 12 previous months of data to get my first 52-week range of values, the period between November 2009 to October 2010 were used for this purpose.
This gave us actionable data from November 2010 to October 2019 – or 108 months of closing prices per share.
It is important to note that in this experiment we are ignoring dividends received and are purely working on the basis of the price of the stock. This keeps our analysis simple.
Step 3 : Identifying Months when the Stock Price reached a 52-Week Low
All 20 stocks in our sample set have reached their 52-week low atleast once in the last 9 years. The stock which had the least 52-week low months was Page Industries Limited which reached its 52 week low only three times.
Here’s a list of the stocks that had a 52-week low on just 7 or less occasions from a possible 108 months
- Page Industries – 3 times
- Petronet LNG – 5 times
- City Union Bank – 5 times
- Nestle India – 6 times
- ACC – 7 times
It is interesting to observe here that all these stocks have not had a similar trajectory. You might even be thinking that the stocks might have steadily gone up in this period which is why a low number of 52-week lows were accounted for.
Well, this is true for stocks like City Union Bank which has gone in a single direction (up). However Page Industries has seen a reverse V with the stock going to all-time highs only to drop by almost 50% in recent months. ACC stock price movement has another distinctive shape as the stock has been range bound for the last few years.
Like we have stocks that had few 52-week lows, there are some stocks which had registered their yearly low on 20 or more occasions. These were –
- Vedanta – 24 times
- IDBI Bank – 22
- Edelweiss Financial Services – 21
- Oriental Bank of Commerce – 23
- HEG Limited – 25
Step 4 : Reconstructing the model
We now have the number of occasions when our sample stocks had reached their 52-week low. These happened 257 times and we will go on to apply an investment of ₹10,000 entailing a total investment of ₹25,70,000 at different points of time.
For example – In the case of SBI, investment of ₹10,000 were made in Aug 2011, Sep 2011, Oct 2011, Nov 2011, Dec 2011, Jul 2013, Aug 2013, Sep 2015, Oct 2015, Dec 2015, Jan 2016, Feb 2016, Mar 2018 and Apr 2018 — at the prevailing prices in those months (we took the stock price on the last day of each month for the purpose of this experiment)
So, when we invested ₹10,000 on Aug 2011 in SBI, I received 50.7 shares (although fractional shares are not allowed in India, we will assume so for the purpose of this study). Then in Sep 2011, on my investment of ₹10,000, I received an additional 52.3 shares (as the price of the stock had gone down from ₹197 to ₹191) taking my cumulative share purchases for SBI’s stock to 103.0 shares. When I do this over the 14 occasions when SBI had a 52-week low, the total investment of ₹1,40,000 fetched me 726.4 shares of SBI until April 2018 when it last reached a 52-week low.
The same exercise was done for all the remaining stocks and when the sum total of my purchases were calculated in November 2019, I had a corpus of ₹56,35,709 from my investment of ₹25,70,000.
Now it is important to understand that these investments did not happen in November 2010 when we started our study but happened at different point of time. This means we need to use the XIRR function in Microsoft Excel to understand our annualized returns from this study. I did this and figure that this strategy of picking up 52-week low stock prices actually gave me an annualized return of 17.1%.
17.1% is pretty good. And remember, this figure does not include dividend. So if I were to add dividend at a miserly 1.5% and don’t account for any dividend reinvestment opportunities, the 52-week low strategy seems to have given me a solid 18.6% annualised return over the last 10 years.
Step 5 : Comparing the 52-week Low Strategy with a Regular SIP Strategy
The last leg of our study is to understand how the 52-week low stock picking strategy compares to a regular systematic investment plan or SIP strategy (also called dollar-cost averaging strategy in the United States) in terms of performance over these 108 months.
Under the SIP strategy, we would have made an investment of ₹10,000 per month on these 20 stocks which would have totalled an investment of ₹2,00,000 every month at the prevalent price of the stock. In 108 months, a total of ₹2,16,00,000 would have been invested and the corpus accumulated in this time would have been ₹4,46,01,451.
Running the XIRR function, the ex-dividend annualized returns of the SIP strategy comes to 15.4% which is about 1.7% lower than the returns under the 52-week low strategy.
The 52-week low strategy of investing came ahead of the more popular SIP investing strategy from a returns perspective with the 52-week low strategy offering a 17.1% annual returns over the 15.4% returns received under the SIP strategy
However, we also noticed that while the 52-week strategy did maximize returns, it might have also let go of a lot of opportunities. Like of the 108 months under consideration, there were zero buying opportunities in 35 months i.e. none of the 20 stocks in our sample hit their 52-week low in those 35 months.
One of those big patches was Jan 2012 to Jan 2013, when only one stock for just one month hit a 52-week low. So while with the 52-week low strategy I could only invest ₹10,000 in those 13 months, with the SIP strategy I could have invested ₹26,00,000. This ₹26,00,000 invested between Jan 2012 to Jan 2013, would have yielded for me in November 2019 a corpus of ₹79,07,771 from that bunch of investment. From an XIRR basis, I would have stood to make returns of 16.3% – which is a far higher return than I would have earned by staying in cash (bad move!) or in a debt fund (9-10% during the period under consideration)
Overall, purchasing stocks which are at a 52-week low assuming that a regular investor is going to make a killing out of it seems to be wishful thinking. Yes, there seems to be some upside in performance but a 1.7% increase in return would be enough to make such an investor quite disappointed.
Over the next few posts, I will be compiling more information on the art of investing and how one can scientifically find winners among thousands of stocks in the investing universe.