I wanted to write a follow-up article on the recent "21 Long Ideas on the 52 week high list" article to cover the lows as well. What is the concept behind buying stocks on the 52 week low list?
The 2003 working paper was titled, "Volume and Price Patterns Around a Stock's 52-Week Highs and Lows: Theory and Evidence." The evidence they found was as follows:
- Stocks making the 52 week high and low list see an increase in retail trading volume.
- One week to one month gains are typically positive from when the stocks are listed as such.
The paper further discovered that this effect was more pronounced on the Nasdaq exchange. The more clear the valuation of a stock was, the less marked the effect was. For instance, some stocks trade at cash value. These types of stocks would be less likely to pop then stocks with unclear intrinsic value or a company where share prices and valuations have an unclear relationship. High PE stocks and high price to book ratios are two such examples. Also, the lower the volume the more effect these traders buying the 52 week lows would have.
With this, I wanted to create a scan of suitable stocks that might see a pop over the next week to month. These are the criteria for such stocks:
- NASDAQ exchange.
- Less than 2 billion market cap.
- Price over $.1
- Average volume under 1 million.
- New 52 week low.
The Beaten Down Stock List
- (VICL) Vical Inc.
- (UEPS) Net 1 Ueps Technologies Inc.
- (TSTY) Tasty Baking Co.
- (SPRO) SmartPros Ltd.
- (RXII) RXi Pharmaceuticals
- (MCOX) Mecox Lane
- (JRJC) China Finance Online Co. Ltd.
- (JOEZ) Joe's Jeans Inc.
- (ENOC) EnerNOC, Inc.
- (EMITF) Elbit Imaging Ltd.
- (CVVT) China Valves Technology, Inc.
- (CSKI) China Sky One Medical, Inc.
- (CRIC) China Real Estate Information
- (COMV) Comverge, Inc.
- (CDCS) CDC Corporation,
- (CETV) Central European Media Enterprises Ltd.
- (CBEH) China Integrated Energy, Inc.
- (ARDNA) Arden Group Inc.
The first thing that jumped out at me is that six of these stocks on the list are from China and one is from Hong Kong. It may be completely unrelated but investors are keeping a close eye on China as they raise interest rates which may be followed by other tightening measures to cool inflation.
Picking Apart the List
To be sure, all of these stocks have a reason for the decline. That wasn’t the point of the 2003 paper or this article. The idea is that increased coverage of these stocks could lead to a short-term profitable pop over the next week to a month.
What are some of these stock features to look over? Since we are not interested in long-term holding, fundamentals are less relevant. What we may want to look for is an increase in trading volume and possibly which support levels are nearby.
- COMV just fell below $6 support levels. March 9 earnings are approaching. Despite an analyst downgrade, this could make the list of a potential stock popper as average volume is only about 187K.
- ARDNA is another stock that is in a downward channel that is greatly picking up volume. If prices dip down to $75 it just might see a short term pop off the bottom of its channel.
- SPRO is very thinly traded, which is supposed to be a good thing with the 52 week low list. That being said, with only about $14K of money traded daily on this stock, it would be hard to see how someone could get in a decent position without affecting share prices greatly. Still, its bouncing on support…
- UEPS is another downward channeling stock heading quickly toward the bottom at $9 per share.
If there is a pop, and that is a big if in my mind, the stocks with very high short ratios could experience a lift. But this usually is more likely to occur when there is a big fundamental change in the stock and not simply a small group of traders pushing up prices temporarily. The highest float short percentages are CBEH (24.2%), ENOC (18.33%), CVVT (17.37%), CSKI (14.55%), RXII (9.6%), and MCOX (9.4%).
Trade This List? Uhhhh, Not Quite Yet
While I am sure Huddart, Lang, and Yetman did their due diligence with this system on 2,000 stocks over 24 years of data, something in my gut tells me that buying a dropping stock with the hope of retail investors giving it a brief pop in price is too high risk for this guy. For me, I’ll stick to the 52 week high list and trade breakouts similar to the CAN SLIM theory if I will trade either of these two lists at all.
For others, they might love the high risk, high reward of bottom feeding stocks. What’s your opinion? I’d love to hear from some that have recently picked up these stocks and some rationale as to why and how long they plan to hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.