How investors can gain insights from 52 week low stocks

A stock near its 52-week low means that it is trading near the lowest price within a one year period based on the daily closing price for the security.

Many value investors tend to show increased interest in 52-week low stocks because it may mean that they have currently fallen out of favour and primed to rebound once things get better.

Walter Schloss hunt for stocks on 52 week lows

To those uninitiated, Walter Schloss is a legendary value investor who worked alongside Warren Buffett in the past.

His strategy is simple - comb for bargains with a low price-to-book-value ratio and have fallen hard to near 52 week lows. These companies also need to possess strong track records and healthy balance sheets.

Schloss further limits his portfolio risk by diversifying across 100 stocks with a limit of no more than 20 per cent of entire portfolio in one single stock.

The result?

An impressive track record where he achieved a 21.3 per cent CAGR over the period of 28 and a quarter years from 1956 to Q1 1984 over his investing career as shown below:

Below is a quote that summarises his risk-averse investment strategy:

"If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me."

- Walter Schloss

3 questions to ask when stocks hit 52 week lows

Buying a stock near its 52-week low can be a good way to ensure you don't overpay for your investment, though it doesn't always mean it's a good value.

Hence, investors would still need to do their homework to examine the company’s financial health and prospects closely.

Here are three key questions investors can ask when a stock price hits 52-week low.

1. Why are the share prices depressed?

Firstly, the most fundamental question is to check out the reason behind the share price drop.

Is the share price decline due to mismanagement of the business, causing a permanent decline in value?

Or is it caused by temporary poor market conditions that will rebound back to the normal soon?

If it’s the former, investors may need to steer far away from the company.

But if it’s the latter, investors may do more research to take advantage of such mispriced opportunities.

2. What is the management team doing?

During this Covid-19 pandemic, many businesses have been adversely impacted, especially the aviation, hospitality, F&B, entertainment industries.

While this is an unprecedented event, it yearns for even better leadership quickly recalibrate, innovate and find new ways to strive through these difficult times.

One important aspect here is the allocation of capital.

Is the management team cutting down on expenses (pay-cuts, retrenchments) to preserve their capital?

Or can they utilise the cashflow to repurchase shares when the share price drops to an all-time low?

Or are they even able to acquire competitors in the cheap to set the stage for future growth?

These are just some questions which investors can use to assess if the management team is doing a good job in steering the company out of the woods.

3. How are their financial position and cashflow doing?

More often than not, stocks that keep making new 52 week lows are companies that have deteriorating fundamentals with hefty amounts of debt.

One good example would be the fall from grace of Noble group (CGP.SI). Once considered as a blue chip stock due to its inclusion in the STI Index, it incurred massive debt, has a poor business model and negative cash flow.

As a result, its last share price has crashed from $7.5+ to $0.081 post consolidation and rights offer and was subsequently suspended as of Sept 1, 2019.

The case in point is that investors should always look at whether the company possess good fundamentals such as a solid balance sheet and positive free cashflow.

These are the two key metrics for a company to tide through challenging times like this covid-19 pandemic.

Where can I find 52 week low stocks at ShareInvestor?

There are two ways for you to sieve out ‘52 week low stocks’ using www.ShareInvestor.com.

1. ‘Market Screener (FA & TA)’ Tab under ‘Screener’ Section

Under the ‘Screener’ section, click on the ‘Market Screener (FA & TA)’ tab:

Select the criteria by clicking on ‘Click Here To Start’.

Head over to the last tab ‘Prices and Other Conditions’ and tick ‘Current Price vs 52 Weeks Low’.

Click on ‘Add Criteria’ button.

You can then choose how much deviation the share price is from its current 52 weeks low price (i.e. Current Price is within 5 per cent of 52 week low).

2. Fundamental Filters under ‘Prices’ Section

As shown above, you can find the stocks near 52 week lows under the Fundamental dropdown selection.

Conclusion

When stocks fall to their 52-week lows, it can be an opportune time for investors to snatch up a good deal if the company has a set of solid fundamentals and potential to rebound in future.

Ultimately, a company’s share price will follow its financial performance in the long run and if things aren’t looking rosy, the share price can continue to decline no matter how low it has gone too.

Thus, screening for 52 week low stocks can be a good starting point but one has to still do the due diligence required.

This article was first published in Investor-One.