Why the Price-Range is a Useless Metric

Last updated August 7, 2022

A common trap that investors fall into is paying any mind to the price range that a particular stock has sold for in the past. The price-range, like many other metrics of stock “evaluation”, has very little to do with the actual value of a stock.

Seeing that a stock is selling at a relatively low price compared to 5 years ago is an arbitrary sense of “value”. For one thing, just because the stock has fallen recently does not mean that it will stop, much to the detriment of short-term swing traders. This is because the stock price does not affect the business’s ability to generate earnings. It’s the other way around.

If a business is not capable of earning as was previously thought by the investing public, that stock’s dive is rightly deserved and should not be seen as cheap just because it is at a “52-week low”. Conversely, if a stock has undergone a recent expansion that leads to a permanent increase in earning power, then that stock rightly deserves to trade on the top range of the 52-week range and should not necessarily be seen as expensive.

Apple stock, for example, has closed in the top range of the 52-week range 70% of the times1 in the past 10 years during 2012-2021. Their stock price has increased at an average rate of 30.5%2 in that same time frame. The price range indicator would suggest that Apple was overpriced in almost all of those years, but Apple’s constant ability to increase their earning power renders the 52-week range useless. If an investor were to focus intently on the price range metric, they would have overlooked the most profitable company in the world.

  1. https://www.nasdaq.com/market-activity/stocks/aapl/historical
  2. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2012&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=AAPL&allocation1_1=100

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