Considering stocks and aiming to buy when they’re near 52-week lows can be dangerous. But it can also be a way of finding companies with a cheap valuation.
The danger arises because of trends. Studies have shown that trending stocks tend to continue trending more often than they handbrake-turn and change direction.
And a stock near its 52-week lows suggests it has suffered a downtrend that may still be in progress.
Fundamental reasons for price falls
I’m not inclined to put much faith in share-price charts. But falling stocks often plunge for a reason. And often that reason is a decline in earnings, cashflows and operational momentum.
Nevertheless, the whole ethos of value investing often has investors sifting through the dustbin of fallen stocks to find the rough diamonds. But, as mentioned, searching for the precious stones among the slag takes some skill and can be a frustrating experience.
And operational problems in the business tend to come with the territory. So we aren’t likely to find companies trading well in the short term – that’s more a characteristic of stocks trading near 52-week highs.
Meanwhile, my recent sift through the 52-week-low screen has thrown up a company I think is worth further and deeper research.
It’s the housebuilding firm Persimmon (LSE: PSN). And investors probably don’t need me to tell them about the challenges faced by the wider property sector right now.
With the cost of mortgage borrowing rising, many are waiting for the possibility of a house price crash. And Persimmon’s share price reflects investors’ anxieties as well as weakness in the business.
In April, the company reported a disappointing set of first-quarter figures it said were due to “challenging” trading conditions. However, the directors said trading was beginning to show some signs of encouragement since the end of the quarter.
A strong balance sheet
Nevertheless, I’d describe the outlook comments as hopeful rather than optimistic.
Meanwhile, City analysts expect the crash in earnings to stabilise in 2024. And the best time to buy a cyclical stock like Persimmon is when the share price and earnings are near the bottom of their cycle. And that might be now. Or perhaps it’s not, and the stock has further to fall.
Either way, I reckon it’s a good time to pile in with thorough and deeper research. Because a well-timed entry into the stock may serve investors well over the coming years.
Indeed, investors who bought Persimmon near its lows in 2008 saw multi-bagging returns over the following decade. And a similar outcome may happen again, although that’s not certain or guaranteed.
But Persimmon has a strong balance sheet, flush with a sizeable net cash position. And I see the business as being well-placed to ride out the downturn in the housing market.
It may not prove to be the best time to buy the stock right now. But it’s certainly a good time to watch it closely with the aim of buying it at some point.
