After a quick dip in March, the main UK share indices have bounced back nicely and are currently hovering around breakeven on a year-to-date view. The only exception is the FTSE 100, which has eased ahead slightly thanks to some heavyweight risers.
However, this broadly neutral performance masks the fact that there have been some big fallers so far this year. This is especially the case in the FTSE 250 and small-cap indices.
Academic research into investor behaviour research suggests that we may be able to use this situation to our advantage. Put simply, investors have a tendency to overreact to bad news.
For small caps especially, this negative momentum may then be compounded by a wave of shareholders selling purely because of a stock’s falling price, which may have triggered stop losses.
For investors who can tolerate uncertainty and perhaps look a little further ahead, these big fallers can sometimes offer opportunities. I know that some of my biggest successes over the years have come from buying shares that have been temporarily out of favour. This is because they’ve offered me the opportunity to benefit from a re-rating as well as ongoing growth.
You don’t necessarily have to hunt among the weeds to find potential bargains, either.
One year ago, fashion group Burberry (LON:BRBY) (disclosure: I hold) was trading at 52-week lows of around 1,600p. The shares have risen by 60% since then and are now nudging 2,600p.
Bear in mind that Burberry is a high-quality FTSE 100 company that was never really in any danger of even reporting a loss, let alone suffering financial distress. All that was really needed was the confidence to look beyond the pandemic and trust that this 167-year-old brand would be able to pick up where it left off.
Oddly enough, Burberry now qualifies for Stockopedia’s 52-week high momentum screen. This is perhaps a useful reminder of what a powerful force momentum can be over the short and medium term.
In the remainder of this piece, I’m doing to demonstrate a simple screen I use to look for shares trading at 52-week lows. I’ll then highlight some shares I think might be worth a closer look.
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