Most investors, professional and novice alike, get excited when popular stocks are hovering around their 52 week lows. Afterall, it becomes extremely difficult for most investors to ignore the 52 week low as a viable buying signals. Most players term these stocks to be “undervalued”.
There are many good books on this subject. has been good research on this subject.
In this post, by backtesting data, we examine if buying stocks at 52 week lows is a viable stock picking strategy. This shall be put to the sword over a systematic investment plan (SIP) strategy. Further, we shall measure it over a medium to long term period.
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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 restrict this stocks in this experiment. Consequently, the sample shall operate within the top 200 stocks in the Indian stock exchange.
Further, we shall now go about randomizing the stocks that will constitute this experiment. Hence, I have selected every 10th stock in the NSE 200 Index at the time of writing this article (03.11.2019). We start from the 10th ranked company i.e. State Bank of India.
A second criteria that I have added is that the stock should have been listed for atleast 10 years. This will ensure that we derive optimum value from this experiment
OUR 20 sample STOCKS
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 International161st – 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 side note
A look at this list got me curious. What if I have bought 1 share of each of these 20 stocks in November 2009 i.e 10 years back. Then how much would that have cost me?
The answer to that is that it would have cost a miserly ₹6,790. And against this sum, I would have 1 share of all the above 20 companies.
If you are thinking what those 20 stock units will be worth in 2019. Then you are as curious as me. As, those 20 shares would have summed to a humongous ₹49,195. Or, 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. These two stocks are Nestle India and Page Industries which would have contributed over 80% to the profits
Step 2 : Collecting the Stock’s Monthly Closing Price
I thought of using the daily closing price of each of these 20 stocks but that would have been too many data points. To keep it simple, I went on to pick the closing price of each stock on the last day of the month. The start month is November 2009 and the end month is 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 was used for this purpose.
This gave us actionable data from November 2010 to October 2019 – or 108 months of closing prices per share.
Please do note that we are ignoring dividends received in this study. We 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 (out of 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 be thinking that the stocks might have steadily gone up in this period which probably accounts for 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. For this stock, the prices went 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 (like Page Industries), there are stocks at the other end. Some stocks which had registered their yearly low on 20 or more occasions 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 a total of 257 times. And we will go on to apply an investment of ₹10,000 on each of these ocassions. This entails a total investment of ₹25,70,000 at different points of time.
Investing in State Bank of India (SBI)
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. Remember, 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.
Performance of 52 week low strategy
I did this same exercise for all the remaining stocks. The sum total of my purchases when calculated in November 2019 had swelled my corpus to ₹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. Infact these purchases 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 calculated this and found that this strategy of picking up 52-week low stock prices 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 our control group. Which means, how the 52-week low stock picking strategy compares to a regular systematic investment plan or SIP strategy. (SIP is called dollar-cost averaging in the United States). We shall see this 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. These purchases would have been 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%. This is 1.7% lower than the returns under the 52-week low strategy.
My Observations
The study shows that the 52-week low strategy of investing came ahead of the more popular SIP investing strategy from a returns perspective. The 52-week low strategy offered a 17.1% annual returns over the 15.4% returns received under the SIP strategy
However, while we 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. In other words, 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 has hit a 52-week low. This too happened for just one month. 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.
Further, on an XIRR basis, I would have stood to make returns of 16.3%. This is far higher return than I would have earned by staying in cash or in a debt fund. Debt funds would have offered 9-10% during the period under consideration.
Overall, purchasing stocks which are at a 52 week low and assuming regular investors would make a killing when the market rises is wishful thinking. There is some upside in performance but a 1.7% increase in performance would not delight most investors.
Additional Resources You Might Like
Here are some articles you might like:
- Rakesh Jhunjhunwala and his secrets to investing (Part 1)
- Building a high return portfolio with index funds – a step-by-step approach
- Complete SIP Investment Guide (over 8000 words compedium updated until 2020)
- The $4,000,000,000,000 index fund story
- Best SIP plans for achieving long term goals