One alternative form of momentum investing is to buy stocks trading near their 52-week highs. Another form is to buy stocks trading near their historical (record) highs. The former strategy—buying stocks trading at 52-week highs—has performed better than the latter. Notably, both strategies work better when stocks priced below $5 and January returns are excluded. The improvement is more pronounced for stocks trading near their historical highs.

California State University professor Ajay Bhootra looked at exchange-listed stocks traded between 1963 and 2015. He analyzed returns with no filters (all stocks and all months) as well as with the $5 and January filters applied.

A portfolio composed of stocks ranking in the top 30% in terms of their relative closeness to their respective 52-week highs resulted in monthly outperformance of 0.35% relative to a portfolio of stocks ranking in the bottom 30%. A portfolio composed of stocks ranking in the top 30% in terms of their relative closeness to their historical (“record”) highs underperformed a portfolio of stocks ranking in the bottom 30% by 0.18%.

When stocks under $5 are excluded, the 52-week high-minus-low portfolio (top 30% minus bottom 30%) realized a monthly return of 0.73%. Among stocks trading near their historical highs, the monthly returns for the top 30% stocks (high) were 0.36% better than the bottom 30% stocks (low). Excluding returns for the month of January increased the high-minus-low monthly return for the 52-week high portfolio to 1.08%. The historical high ratio portfolio returned 0.60% on a high-minus-low basis.

When stocks priced below $5 and returns from the month of January are excluded, the 52-week high ratio portfolio realized a monthly return of 1.07% on a high-minus-low basis. The historical high ratio portfolio’s high-minus-low monthly return improved to 0.74%.

A reason why the 52-week high ratio portfolios outperform the historical high portfolios is due to investor reaction. Bhootra’s analysis backs a 2011 study by Jun Li and Jianfeng Yu (“Investor Attention, Psychological Anchors, and Stock Return Predictability”) showing investors underreacting to the good news associated with 52-week highs. Conversely, investors view the distance from a 52-week high as a proxy for how much negative news is priced in.

“Another Look at Anchoring and Stock Return Predictability,” Ajay Bhootra; Finance Research Letters, 20

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