Soon, you'll inevitably start hearing about how more stocks are hitting 52-week highs. Yet before you decide that means a stock is a smart buy, keep in mind just how low most stocks fell over the past year.
On the surface, hundreds of companies may look more attractive as their 52-week highs decline. Similarly, the recession's impact on corporate earnings will make future comparisons look much better than they have recently.
Looking at 52-week highs and lows can give you some vital information, ranging from the amount of volatility in the market to whether a company is on the path to greatness. Yet Fools know that there's much more to picking stocks than looking at past stock prices. In the wake of the market's furious rally since early March, it's more important than ever to do your homework before you buy.
A stock market weather report
For instance, take a look at the chart below:
|
Company |
Current Stock Price |
52-Week High As of Sept. 1 |
Probable 52-Week High As of Dec. 1 |
|---|---|---|---|
|
MGM Mirage |
$11.90 |
$37.00 |
$16.89 |
|
Wynn Resorts |
$67.35 |
$104.03 |
$74.90 |
|
Citigroup |
$4.64 |
$23.50 |
$9.00 |
|
Bank of America |
$17.35 |
$39.50 |
$18.25 |
|
Exelon |
$48.58 |
$77.85 |
$58.98 |
|
Sotheby's |
$17.15 |
$27.51 |
$17.95 |
|
Arch Coal |
$22.83 |
$51.69 |
$24.10 |
|
S&P 500 INDEX |
1,057.58 |
1,303.04 |
1,080.15 |
Source: Yahoo! Finance, as of Oct. 7.
You'll see soon-to-be lower highs in many industries. Price levels of 52-week highs could drop 25% to 60% between September and December. Moreover, many stocks like the ones above won't have to gain much ground to reach a new 52-week high. Instead, the high will drop enough to meet the current share price.
Trust, but verify
A skeptical view of new highs will come in handy, especially after viewing the spectacular gains since March. For instance, battered casino stocks have found traction, and hopes for their continued survival have pushed shares up strongly. Similarly, several financial stocks have also brought multibagger gains.
Yet when you compare their closing prices against their September 2008 levels, those bounces look a lot smaller. As 52-week high prices start to fall, though, you may dangerously forget just how far those stocks fell before they started to recover.
From a flurry of secondary offerings to a September jolt of new initial public offerings, the market's abuzz with enthusiasm. As stocks rise and their 52-week highs fall, make sure there's a fundamental reason to justify your optimism.
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