Why you should avoid scavenging amongst the 52-week low lists

When scanning for your next idea, I'd first focus on company fundamentals before share price.

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The markets are relatively strong at the moment, with the S&P/ASX 200 (INDEXASX: XJO) up 8.2% since the Brexit-inspired melt-down in late June.

However, this won't prevent the optimists out there from scanning the '52-week low' lists to see if there are some potential bargains on offer, even in the midst of bullish sentiment.

Unfortunately, there's not a lot to choose from (as you may expect).

Scanning the list to observe such names as White Cliff Minerals Ltd (ASX: WCN) and Triangle Energy (Global) Ltd (ASX: TEG) shows there are companies out there that perhaps not many investors know about.

And there lies the opportunity right?

All I have to do then is go and buy up these companies' shares trading at 52-week lows and then wait for the inevitable rise.

Well … wait, perhaps not.

There's a lot more to it than just looking at share prices relative to where they were in the last 12 months.

The most obvious thing to ask is why these share prices are so low? Is there some sort of catalyst that has pushed prices down, or do they simply not show any prospects for positive operating cash flow (let alone real net profit).

Let's take a quick look.

White Cliff Minerals Ltd currently trades at $0.006, it has shown negative cash flow, consistent losses and no revenue in any of the years since it floated on the ASX back in 2007-08. Being a mining exploration company, its existence is at the mercy of its very generous shareholders and creditors who are basically keeping it alive in the hope that one day its nickel-copper and gold mines will make their owners rich. Speculators love this stuff, but for investors, I'd steer clear of this one.

Triangle Energy exhibits similar characteristics to White Cliff Minerals in that it's cash-flow negative (this time since 2005-06), it has incurred losses since the beginning of listed life and has no revenue. Shares outstanding have blown out from 96.2m in 2006 to 3,195m at the end of June 2015. And I thought White Cliff Minerals' shareholders were generous! To be fair, this company is in the energy sector focusing on the production of oil and gas in Indonesia and one day perhaps this company will earn some decent revenue, but buying this company because it's trading at a 52-week low of $0.002? Forget it.

If you're going to screen companies for potential investment, I'd focus on business fundamentals such as operating cash-flow, net profit, earnings-per-share, and balance-sheet ratios such as return-on-equity and net debt-to-equity (for starters).

Whatever your screening technique, hopefully you'll be able to also read widely on companies (such as here at www.fool.com.au) and obtain a better understanding of what companies are worth a closer look. Companies such as Amaysim Australia Ltd (ASX: AYS), IPH Ltd (ASX: IPH) and more established and well-regarded businesses such as Iress Ltd (ASX: IRE) and CSL Limited (ASX: CSL) may pop up on your list.

Foolish takeaway

Looking for your next stock idea by scanning the 52-week low lists is dangerous in that you're focusing only on the price of the shares with no regard to the underlying value.

Of course, if you decide you're going to do a fundamental analysis on the company at hand anyway, you'll probably find that, in a strong overall market, there are some valid reasons why particular companies are trading at their 52-week lows.

This is different of course to a major bear market where many of the familiar stocks have been sold-off, but my suggestion would be to continue with the fundamental analysis and forget about the relative share price as your starting point.

Remember, there are a lot of companies out there on the ASX that you don't have to buy.

Motley Fool contributor Edward Vesely owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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