Prime Transaction: How can we buy stocks at lows and sell near highs?

An extremely simple, but time-proven, method for choosing companies to be part of an investor's portfolio is to buy stocks at the lowest prices of the last year and sell those that, following significant increases, they reached the maximum level of the last year, according to a material of the Prime Transaction brokerage company, which can be consulted in the attached document.

The strategy involves removing shares of companies that are falling because their financial situation or outlook has changed significantly in a negative way. In the same way, one should not sell shares of some companies that, although reaching multi-year highs, have strong growth vectors that can take the stock market quotes even higher, the document also mentions.

"Basically, this strategy works as an extremely simple selector of eligible companies to produce significant returns above the market average in the next period. At the opposite pole, it proposes companies that may have exhausted much of their growth potential and that if you own them, it could be the time to mark the profit of that investment", according to the document signed by Alin Brendea, the Director of Operations of Prime Transaction.

According to the document, this strategy is suitable for semi-active investors as they are, in reality, the vast majority of investors present in the stock market.

• The characteristics that must be fulfilled by the shares that will be traded based on the strategy

Liquidity, namely a minimum level, is the first criterion that a company's shares must meet to be eligible for the strategy, in order to eliminate market accidents as much as possible, according to Prime.

Later, to sort out the eligible companies, two types of filters can be used. The first is of an objective nature, composed of stock market warning indicators. "We can build a system based on the evolution of the basic variables of the fundamental analysis such as: revenues, profit and debts. Do their dynamics explain the fall or rise in shares? Is it trending against the trading course? If so, the companies become eligible," the material states.

The second filter is of a subjective nature and relates to the communications and information that companies periodically provide in the market. "Based on it, we will try to outline the perspectives of the selected companies. The stock market indicators used in the first filter capture the historical situation of the companies, their past. However, a new project or contract won or lost, an operational update or other information with a significant impact on the near future are not captured by the financial results. Therefore, the eligible companies will have to be audited also through the lens of the latest announcements provided to the market or the mass media", according to the document.

• How to profit from such a strategy?

The proposed strategy is based on the cyclicality of investment sectors, and in the stock market there is an investment phenomenon called sector rotation, according to the Prime material.

"Periodically, the market focuses on one or a few sectors that present momentary arguments for above-average stock market growth. These market segments attract significant capital, and companies in the sectors in question tend to grow significantly. The capital migrates from other stock exchange areas, areas where the issuers representing them - momentarily out of the public eye - register slightly downward trends that bring their trading rates to attractive levels", the document states.

According to Prime, the strategy seeks to be one step ahead of the market in selecting companies that will soon return to investors' attention and liquidating those that have peaked precisely because momentary market interest has pushed them to much higher values.

"In the Romanian market, such a recent example is that of the energy producers sector. The increase in the price of energy products has focused the attention of investors on such companies which, in corpore, have increased. When the energy prices corrected, the interest of investors decreased, a fact immediately surprised by the stock market quotations that depreciated", the report states.

Prime offers an example of using this strategy in our market, selecting issuers with a minimum capitalization of 500 million lei and whose shares accumulate a daily trading average of at least 200,000 lei.

Applying the other filters, based on the strategy of approaching the last year's lows, Prime finds TeraPlast and Nuclearelectrica companies interesting for new investments. Based on the strategy of prices close to last year's highs, Prime has selected Aquila (AQ) and Sphera (SFG) titles for possible sales. The detailed exposition of the strategy and how it can be applied in our market can be consulted in the attached document.

"The example is subject to subjectivity and should not be treated in any way as an investment recommendation", it is also mentioned in the Prime report, signed by Alin Brendea.