A working research paper posted in 2003 by Huddart, Lang, and Yetman, highlight behavioral attitudes behind some investor’s decisions to buy stocks. They started with stocks on the 52 week high and 52 week low list to see if this alone would create positive returns with fundamental changes put aside. They did their test on 2,000 firms over 24 years on the AMEX, NASDAQ, and NYSE.
They discovered that smaller companies hitting these ranges (new 52 week highs and lows) saw an increase in trading volume and positive returns between one week and one month. The effect was most pronounced on the Nasdaq with smaller firms that had relatively low daily turnover of shares, and greater ambiguity regarding actual valuation.
The conclusion was that stocks hitting these thresholds received more coverage on stock scans and websites, thus creating a buying push with individual investors through their retail brokers. Bigger stocks did not seem to have the same effect, possibly as institutions and mass trading would dilute the bullish effect of this smaller group of individual traders following 52 week thresholds.
With our scan we will look for stocks that have the following:
- New 52 week highs
- Small Cap and Under
- Under 1 million shares average daily volume
- Nasdaq inclusion
To find companies with less obvious fundamental relevance and casting our nets to include newer businesses, we will add in a filter for stocks trading over 40 times their annual earnings. This makes for a highly volatile, less tied to intrinsic value, basket of stocks.
Revised 52 Week High List
- (LUFK) – Lufkin Industries Inc.
- (OPEN) – OpenTable, Inc.
- (HMSY) – HMS Holdings Corp.
- (ACOM) – Ancestry.com Inc.
- (IPGP) – IPG Photonics Corporation
- (CVLT) – CommVault Systems, Inc.
- (TLEO) – Taleo Corp.
- (SFLY) – Shutterfly, Inc.
- (NILE) – Blue Nile Inc.
- (SSYS) – Stratasys Inc.
- (OTTR) – Otter Tail Corporation
- (RURL) – Rural/Metro Corp.
- (OUTD) – Outdoor Channel Holdings, Inc.
- (GNET) – Global Traffic Network, Inc.
- (TINY) – Harris & Harris Group, Inc.
- (MTOX) – MEDTOX Scientific Inc.
- (ISIG) – Insignia Systems Inc.
- (LMLP) – LML Payment Systems Inc.
- (NLCI) – Nobel Learning Communities Inc.
- (MFRI) – MFRI Inc.
- (AFCB) – Athens Bancshares Corporation
How to Trade the List
Remember that just because on average these type of stocks give back net positive returns, it does not mean if you randomly pick one stock on the list it will go up. The stocks are highly volatile and the increase in interest even makes them all the more so.
You should have tight-stop losses, possibly just below the former 52 week high. A trailing stop-loss is also a good idea to hang onto profits should your stock rise during the one week to one month period outlined in the paper. Of course, trading this way makes due diligence tough since it works more effectively the less fundamental clarity there is. But if you like higher risk, short-term moves, this could prove to be an interesting way to make a speculative trade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.