Lately I've been hearing a lot of commentary along these lines: "Equity prices are a lot closer to 52-week highs than 52-week lows." In turn, this seems to be reason to avoid such securities and wait until the price inevitably comes back down. On the surface this might appear to be rather sound logic - after-all you would much rather buy closer to the low than the high, right? Well I'm here to suggest that these price range data points are a bit of an aberration. More specifically, defining stock prices within a 52-week range forces the mind to think within a specified area. We think in tops and bottoms - minimums and maximums - rather than linearly. And the trick of it all is that stock prices of profitable businesses tend to be erratically exponential.
Let's use a few examples to better demonstrate what I mean. If one were to look up the 52-week range of Johnson & Johnson (NYSE:JNJ) for instance, you would find a low price of $72.42 and a high price of $95.99.
When you see this 52-week range for JNJ, you might think that you have some insight into the stock. You might think: "OK, Johnson & Johnson has been trading in this $24 range and today it's on the high end of the spectrum." In turn you might conclude something along the lines of: "the price is too high today, I'll just wait until it gets back down around $72." Yet I would contend that this type of thinking would be a great folly. It feeds on the human psychology of not wanting to pay $3 for something that sold for $2.50 last year - even though it still might be offering a reasonable proposition.
If you dig into the numbers, you find that JNJ was trading at $72.42 on January 22nd of 2013 - which is indeed within the last year. Yet this might not necessarily tell you that much. If you work backwards from January of 2013, with a price around $72, you would find a 52-week range of roughly $62 to $73. Said differently, at the time JNJ was trading at $72.42 it was actually much closer to being a 52-week high rather than a 52-week low. In turn, if you had a similar mindset about the 52-week range back then, you still wouldn't have bought a share.
It's paramount to consider that while the 52-week low number is a mathematically accurate data point, it isn't necessarily a tradeable notion. That is - unlike 52-week highs - shares of companies never have to trade at their 52-week low. Obviously they do from time to time, but it's clear that profitable companies tend to have a propensity to increase in share price. As long as the price generally trends upwards without severe short-term declines, a 52-week low really doesn't tell you anything.
And of course this idea isn't limited to my Johnson & Johnson example.
Take Colgate-Palmolive (NYSE:CL) for instance. Using approximate monthly numbers CL traded at about $37 a share in October of 2010. One year later in 2011, the toothpaste and soap maker was trading at about $45 a share without breaching the $37 mark - which in turn designated a 52-week range of $37-$45. So in October of 2011, an investor might have viewed the 52-week high of $45 as "expensive."
In October of 2012, CL was trading as low as $43 a share - still pretty close to the 52-week high. Once again Colgate-Palmolive shares didn't go lower than this mark, and the new 52-week range was $43-$54. In effect, even though the 52-week data is accurate, it doesn't tell you anything about making an investment decision. The new 52-week low was once the old 52-week high. Incidentally, Colgate-Palmolive's current 52-week low is about $53 - near the 52-week high of 2012.
You could be sitting there today looking at the 52-week range of CL and saying "oh, CL traded in the range of $53-$66; I'll just wait until it hits $53 to buy." Well there's nothing that forces that time to come. When the range was $43-$54 it never went back to $43. When the range was $37-$45 it never went back to $37. It's entirely possible to never buy a share in an excellent business simply because you're waiting on the share price to be closer to the 52-week low.
The same ideology can be applied to any one of a number of companies like Medtronic (NYSE:MDT), Chevron (NYSE:CVX) and Kimberly-Clark (NYSE:KMB). Or take a look at this 15-year graph of SCANA (NYSE:SCG).
Sure there are times when the price went lower, but it's obvious that as earnings inch-up the share price generally follows suit. As a result, last year's 52-week high can easily be this year's 52-week low.
Additionally, it should be made clear that I am not commenting on whether or not any of these companies are "overvalued," "undervalued" or somewhere in-between. Rather, I am simply suggesting that the 52-week low metric doesn't tell you this either. You likely need to consider relative valuation, income generation and the long-term prospects of what a partnership decisions might indicate.
Now I have demonstrated similar arguments before by showing that the S&P 500 has hit a new 52-week high literally hundreds of times over the past two decades while reasonable returns can still be had by buying securities at all-time highs. But perhaps two final examples will sum up my point.
The first comes from Warren Buffett. As CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) Buffett has made no qualms about raising the price of candy at subsidiary See's Candies - having raised prices every single year (after the holiday season) for 41 years. So if you're a fan of See's you know that each year you will be paying a higher price for your chocolate treats. For instance, today an 8-ounce box of truffles will set you back $10.25. Last year the same items might have only cost you $9.75. So the 52-week range would be a $9.75 to $10.25. You could forever dream of the day that the 52-week low - $9.75 - comes back, but that's the thing, it doesn't come back. That Warren sure is persistent and as a result the price just keeps on increasing. So while the statement - "the 52-week range is $9.75 to $10.25" - is accurate, it doesn't tell you anything about what price you should pay. And it certainly doesn't tell you if it tastes good.
The same ideology holds with equities. Granted it's not a straight line - and there are certainly exceptions - but by-and-large profitable businesses which continually make more money are going to have share prices (for that matter all prices) that are often closer to highs than lows. It's the same frame of thought as a manager proclaiming brilliance because they made a record profit. Well guess what - if all your money was in a savings account with a .01% interest rate then every year you too would mark down a "record" amount. We need context with these metrics.
The second point that I would like to make is that 52-weeks, or 1-year, is a bit arbitrary. Why not 51 or 53 weeks, for that matter why not 20 or 1,000 weeks? I could tell you that in the past 20 years Coca-Cola (NYSE:KO) traded in the range of $10 to $41 and presently shares are trading at $39.50. In turn, if you used the logic of looking at a range of numbers then you would think that shares today are grossly too high, while simultaneously missing the point that KO makes so much more money today than it did two decades ago.
The bottom line is this: it's not that 52-week low numbers are inaccurate, it's just that they aren't all that meaningful. Knowing that a security once traded lower isn't helpful if you don't also know the underlying valuation metrics at the time. It's the same thing as telling me that gasoline used to cost $0.25 a gallon or that milk went for a buck. Sure those stats can be interesting, but they tell you nothing about the current value proposition. My hope is that investors will focus on what's important rather than what's given. In doing so, you might consider ignoring 52-week lows altogether.
Disclosure: I am long JNJ, KO, CVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.