Should investors sell stocks at 52-week high?
Natwest Group shares reached their 52-week (and 13-year) high earlier this month, closing near 390p per share on 4 November. The new peak was reached after leading broker Peel Hunt upgraded the bank’s price target from 410p to 450p.
The share price has surged by more than 50 per cent since the UK government gave up its controlling stake in the bank in March (along with its role in the bank’s decision making). Recent months have also seen earnings upgrades and mitigations of some legal issues – mainly the prospect of hefty fines from the motor finance fiasco.
The UK government, which held 14.56 per cent stake, has sold directly to Natwest Group 263m shares, representing 3.6 per cent of the group’s issued share capital, at 380.6p per share, valuing the transaction at £1bn. The government has not made a profit on this and the five separate deals since 2021, as it bought the 84 per cent stake during the financial crisis at an average price of 502p. Could the government have mitigated some of these losses by waiting for a couple of months after the 52-week high before selling shares back to the Natwest Group?
Whether investors respond to a 52-week share or index price peak by selling their holdings has puzzled academics and practitioners for some time.
Research shows that after reaching the 52-week high, many stocks carry on rising in subsequent one, six and 12 months. Yet uninformed investors sell; they mistakenly see the 52-week high as the likely peak. This behaviour is puzzling as the 52-week is, fundamentally, an irrelevant, historical price level that investors should not consider in their trading decisions – even if the financial press publishes it each day.
Uninformed investors seem to underplay the importance of the news or trends that has driven the stock higher. Instead, they see the 52-week peak as a freak occurrence, from which the only way is down. In doing so, they are placing it above company fundamentals as a predictor of future performance. In doing so, they are placing it above company fundamentals as a predictor of future performance.
This behaviour may reflect individual investors’ lack of information and insights than company executives and largely explains “momentum profits”. These profits do not reverse when past performance is proxied by its proximity to the 52-week high.
My co-author and I assessed whether corporate insiders are subject to the same anchoring biases as less-informed investors. Psychologists describe anchoring bias as a fixed belief – in this case, having a firm idea around a share’s likely peak. It can also describe a herd mentality, which drives less-informed investors to sell their shares when they reach a 52-week high.
Since company executives, for example, are privy to their firms’ future cash flow projections, they could exploit other investors’ anchoring bias to reap abnormal profits – assuming they were not themselves susceptible to anchoring and other behavioural biases.
We find that insiders adopt dissimulation strategies to conceal their informational advantage and trade profitably when their firms’ stock prices reach 52-week highs and lows, exploiting the anchoring biases of uninformed investors. In particular, we find that when they buy at 52-week high, stock prices carry on increasing, resulting in significant positive returns. When they sell at 52-week high, stock prices do not change significantly, suggesting that they do not sell on insider information that leads to significant price drops. They sell stocks at 52-week highs when they recognise that the peak is only temporary. Thus, their net sell trades at 52-week highs are not aimed at avoiding losses.
These results suggest that while insiders are likely to buy a stock to seek profit, they don’t sell just to avoid losses. They may sell shares in their own company to rebalance their portfolio and diversify their risk, or simply because they happen to need cash (as the UK government arguably did after the budget). They may also refrain from selling on private information to avoid depressing stock prices or in fear of regulatory scrutiny and potential shareholder lawsuits. And, of course, such decisions may simply reflect that insiders each have their own personality.
Therefore, investors, including the government, probably shouldn’t consider the 52-week highs and the 52-week lows as reference points. They are trading on behavioural impulses, rather than on the fundamentals of the company. They may mimic the trading behaviour of insiders to trade profitably or follow the wise advice of always having strong reasons for buying and/or selling a particular stock or index. They are likely to generate positive returns if they diversify their risk and hold their stocks for longer periods, rather than by trying to beat the market by trading on factors that are not fundamental to the future prospects of a company or an index.