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The soaring potential of already pricey stocks

What are we looking for?

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

More about today's screen

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Craig McGee, senior consultant at CPMS Morningstar Canada, created today's offering.

He began by calculating how an investor would have fared since 1985 if she had made a regular habit of purchasing the 30 stocks on the Toronto Stock Exchange closest to their 52-week highs. He assumed the investor would have held equal amounts of each stock and would have refreshed her portfolio every three months by selling stocks that no longer qualified and adding the ones that did.

To provide a counter example, he also looked at how this hypothetical investor would have fared by following the exact opposite strategy of purchasing the 30 TSX stocks furthest away from their 52-week highs.

The results may surprise you. He found that the strategy of regularly buying supposedly pricey stocks that have already shot up in value would have produced a 14.3-per-cent annual average return. That was well above the market's 8 per cent result and far, far ahead of the minus 13.5 per cent annual average return produced by the strategy of buying apparent bargains furthest away from their 52-week highs.

Mr. McGee has provided full lists of the 30 stocks currently closest to their 52-week highs and those furthest away. The top 10 on each list are shown here; go online to see the complete rosters.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools.

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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.

What did we find?

"When speaking to many investors about their process, the phrase 'I can't buy now, the stock's at its 52-week high' seems to come up over and over again," says Mr. McGee. "My response is usually that you shouldn't be scared off just because a stock is trading at high levels. In fact, it's really a signal of strength."

Investors should be aware, though, that "momentum" strategies that depend upon buying recent winners also involve high costs because of the large amount of trading required. You should balance those costs against the gains that you can reasonably expect.

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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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