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What are we looking for?

A further test of most people's instinctive aversion to buying stocks that have already soared in price.

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Last week Craig McGee, senior consultant at CPMS Morningstar Canada, demonstrated that a policy of buying stocks near their 52-week highs could produce market-beating returns for a Canadian investor. Today he looks at whether the same approach works in the U.S. market.

He began by calculating how an investor would have fared since 1994 if he had made a habit of purchasing the 30 stocks on the S&P 1500 closest to their 52-week highs. He assumed the investor would have held equal amounts of each stock and would have refreshed his portfolio quarterly by selling stocks that no longer qualified and adding the ones that did.

He also looked at how this hypothetical investor would have fared by following the exact opposite strategy of purchasing the 30 stocks furthest away from their 52-week highs.

He found that regularly buying stocks that have already shot up in price would have produced an 8.8-per-cent annual average total return. That was slightly above the market's 8.0 per cent result and far ahead of the minus 0.7 per cent annual average return produced by the strategy of buying apparent bargains.

Mr. McGee has provided full lists of the 30 stocks currently closest to their 52-week highs and those furthest away.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

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What did we find?

In the U.S. market, the additional profit from this strategy seems minimal compared to the returns from simply holding an index fund. And keep in mind that "momentum" strategies like this that involve jumping on recent winners also create high costs because of the large amount of trading required.

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More

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