10 shares investors love right now

Looking for signs of optimism? The list of stocks generated by this strategy could be a place to start. 

What a week! A sharp pull-back in prices and the prospect of more uncertainty for the economy means this is a tough environment for investors. As market historians often opine: equities might be the source of the strongest long-term returns, but the volatility can be stomach-churning at times.

In these kinds of conditions, one screening strategy that offers an interesting perspective on the market is the 52-week highs list. It might sound crazy, but amongst the carnage there are some shares that have resisted the downward pressure. 

Most investors take a passing interest in the stocks that are hitting new highs. It’s the kind of information that can be found in newspapers and on financial websites everywhere. But what makes the 52-week high such an interesting datapoint is the psychology behind it. A couple of decades of academic research has shown that new highs can provoke all sorts of irrational behaviour in investors.

The thinking behind 52-week highs

On its own, the 52-week high is a pretty static number. Yet research shows that stocks hitting new highs often drift higher in price over the following weeks and months.

This upward trend is called “post earnings announcement drift”. It’s an academic name for when investors only slowly buy shares that are already trading around new highs. When earnings news about these kinds of share is published, particularly if it’s a positive earnings surprises, prices can be slow to react (as market efficiency momentarily goes out the window).

This confused reaction is caused by what the psychologists Amos Tversky and Daniel Kahneman called anchoring-and-adjustment. The idea is that humans form an anchor, or a belief, using a reference point (like a share price). As new information comes to light (like new earnings news) they only adjust their beliefs slowly, before going on to buy the shares at even higher highs.

In investing, the idea of anchoring around events like 52-week highs and earnings surprises is thought to be a big contributor to the ‘momentum effect’. Research by Thomas George and Chuan-Yang Hwang found that the 52-week high causes irrational pricing behaviour because of anchoring. As that behavioural brake is gradually released, the price drifts higher as momentum takes over.

52-week highs in uncertain markets

Of course, in bearish conditions, when investors suddenly become risk-off - as we’ve seen this week - a 52-week high strategy will be vulnerable. But a glance at the stocks that are still making new highs offers an interesting view of where investors still see reasons to be optimistic.

Here are some of the shares that are currently doing their best to weather the market conditions...

No surprises that the trend here is towards more defensive and less-cyclical sectors, but generally it’s a very mixed picture. Genus (LSE:GNS), the mid-cap animal genetics company, beat earnings forecasts recently, which sent its share price soaring. Meanwhile, commercial hygiene blue-chip, Rentokil (LSE:RTO) Initial, led the FTSE 100 this week as a likely beneficiary of the coronavirus. 

Others making the list include games companies like Codemasters (LSE:CDM) and Team17 (LSE:TM17), and larger defensives like Experian (LSE:EXPN) and Severn Trent (LSE:SVT).

Staying safe in wild conditions

Market turmoil over the past week and the possibility of further disruption to the economy has been partially assuaged by the promise of central bank support. Yet the outlook for investors has certainly become less clear. 

In these kinds of conditions some investors will be looking for bargains while others will be sitting firmly on their hands. Whatever course of action you choose, it’s worth having a solid strategy behind you in order to avoid the worst mistakes that come from instinctive trading. 

And if you’re looking for signs of optimism in an otherwise bearish market, the 52-week highs list could be the place to start.

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.