Checking out the list of new 52-week highs is one of the best "heads up" that investors can get, though many investors might shy away from those stocks because they are "too expensive" or "have already gone up too much".
They could be right in both cases, and even a good company rising for the right reasons can be overbought by a zealous market.
You don't want to buy something just because it has gone up. That would be playing into the "sale of the greater fool" (small "f", not the big "F" that all Fools aspire to), where you don't care how much you pay as long as there is a greater fool behind you to buy at an even higher price.
I don't see a new high as a "buy sign", but as a reason to find out about why it is going up. That's where a lead comes from for stock detectives, who try to figure out if this is another step up to be followed by more, or if the trajectory of the rise is flashing warning signals of an impending sharp retracement.
CSR Limited (ASX: CSR) hit a high of $2.99 last week, similar to other building materials companies like James Hardie Industries plc (ASX: JHX) and Brickworks Limited (ASX: BKW) which hit a high in October. If you think CSR is a quality company and you have been following the housing market story, then is may make sense to buy.
In the case of Brickworks, the market got a little ahead of itself, so after the new high, it pulled back. Pullbacks, like general market corrections, give investors opportunities to buy their favourite stocks at cheaper prices. The company hasn't changed due to the immediate rise and fall, but we may be able to buy it at better value.
Brickworks will benefit from greater housing construction, so it has the potential for higher sales and higher earnings. This may not be the last of its run, but the pullback made a spot where its shareholders can increase their positions with a little more confidence. Since then, it has resumed its climb.
Foolish takeaway
Like a mountain hiker, a share price may go up, sometimes at a furious pace, but after a while it has to take "a breather" before continuing its ascent. If it kept going and going, it could rupture and send the price plummeting once investors get scared off. If the stock in question is new to you, then put on your detective hat and find out what earnings may be in store. Always follow your investing principles and look for good value.
