Low Price Stocks Bullish For Some

Low Price Stocks Bullish For Some

Individual investors have always shown preference to buy low price stocks over high price stocks especially in challenging market conditions amid the chase for higher returns during an upturn due to former’s lower base. Geyatee Deshpande finds out whether this strategy serves the purpose. 

Old habits die hard’. This saying is often used by us in our daily lives and in many circumstances. It only means that it is hard to stop doing things that one has been doing for a long time. Likewise, most equity investors also have developed many habits that stick with them for the rest of their investment horizon. One such common habit is temptation to buy ‘low price stocks’.Here we mean lower denominated stocks like single digit (Rs.5), double digit (Rs.10) and so on. 

The reasons for choosing low price stock over a high price stock is mostly due to expectation of a better chance for quick return given the low base and getting more shares by investing the same amount. Investors are willing to face higher volatility for the greed of higher return. 

While this buying trend is very common among most investors, it will be interesting to know if the strategy of buying low-price stocks as against high-price stocks holds good in long term. Says Rameshbhai Mehta, a stock market veteran, “Practically it does influence one’s buying decision as to whether to go for a low- price stock or a high-price one. It is more psychological than anything. I preferred investing into Ashok Leyland as it used to trade at less than Rs.15 per share while MRF traded close to Rs.15,000 per share in first half of 2013. However, MRF has Bullish For Some Low Price Stocks Individual investors have always shown preference to buy low price stocks over high price stocks especially in challenging market conditions amid the chase for higher returns during an upturn due to former’s lower base. Geyatee Deshpande finds out whether this strategy serves the purpose. outperformed Ashok Leyland. I still find it little difficult to buy stocks that are trading above Rs.1,000 per share. I aggressively hunt for low priced scrips but at the same time I do not totally ignore the high-priced scrips especially when there is enough merit in the growth story.” 

Having said that the question is still relevant – whether focusing on low priced stocks can help generate extra returns without compromising on the risk (volatility) component. 

OUR ANALYSIS 

Performance of stocks (listed on BSE with market cap greater than Rs.200 Cr) for the past two calendar years on YTD basis (as on 25th November) indicates that stocks with high price range have not only outperformed low price range stocks in terms of returns but also outnumbered latter in terms of giving a positive return. 

In simple words, stocks which were quoting at higher prices in January 2019 have managed to perform better throughout the year. Same can be said for those stocks that were trading with higher share price in 2018. 

For the analysis, we have segregated the stocks into various price range: Rs.1-50, Rs.50-100, Rs.100-500, Rs.500-1000, Rs.1000-10,000 and Rs.10000 plus. 

Among the lowest priced stocks (Rs.1-50 as on 31st Jan), only 9 per cent managed to close in green on YTD basis. These stocks gave a negative return of 34% on an average. 

In case of stocks falling in the range of Rs.50-100 as on 31st Jan, 18 per cent managed to close in green on YTD basis. These stocks gave a negative return of 20% on an average. 

As the stock price gets into higher range, it is observed that percentage of stocks ending with positive returns on YTD basis is getting better and returns are also improving in 2019. (See Table below). 

A similar trend has been observed in a falling market as well. In other words, stocks in a higher price range have declined less than lower price ones. Further, percentage of stocks ending with positive returns on YTD basis is getting better as the stock price gets into higher price range. 

2018 and 2019 have been challenging for Indian equity markets given the factors like slowdown in GDP growth affecting many sectors especially automobile sector and liquidity crisis specifically affecting non banking finance companies among others. Consequently, earnings growth of corporate India has also taken a hit. 

Even when broader markets have outperformed key benchmark indices, the trend of high price range stocks ending up with positive returns over a one year period have outnumbered low price range stocks. However, the average returns given by low-price scrips have been far higher than from high price stocks, primarily due to the lower base of the former (See table below). 

For CY17 , we see that nearly 63 per cent of the stocks falling in the price band of Rs.1 to Rs.50 have delivered positive returns while as high as 83 per cent of the stocks falling in the price band of Rs.500 to Rs.1000 managed to deliver positive returns. However the average returns is much higher at 107 per cent for the low price stocks i.e in the band of Rs.1 to Rs.50. This observation is consistent across CY16, CY15 and CY14. The probability of identifying stocks that can generate positive returns is higher in high price stocks however the returns are relatively lower when compared to the low price stocks. 

Conclusion 

Investor mood for the past 18-odd months have been that of ‘risk off’. Accordingly, flows have shifted to large caps including bluechip companies, which are usually high price stocks. This is because they are less volatile and considered as safe haven thanks to their superior fundamentals with stable business profile. This polarisation trend of 2018 and 2019 is nothing but investors’ preference for safe havens (low beta stocks). We expect this to continue till the time “risk off” mood prevails.When investor sentiments will change from ‘risk off’ to ‘risk on’ mode following abundant liquidity, rising trend in GDP and pick up in earnings growth, low-price range stocks as a category are likely to start outperforming high price range ones in terms of returns as the demand for the former usually picks up in a rising market. 

However, investor should always focus on fundamentals and valuation in any market condition whether they are low price or high price stocks. Usually, we call a stock expensive if its price to earnings (P/E) ratio is abnormally higher than the P/E ratio compared to its peers. However, stocks with higher market prices are often called or considered as ‘EXPENSIVE’. So it is the P/E multiple and not market price per share which makes the stock expensive or cheap. 

A stock trading at Rs.1,800 per share can be undervalued even though it is a four digit priced stock. Similarly a stock quoting at Rs.14 may look extremely cheap but may be overvalued given its weak fundamentals. 

Indeed, investor psychology plays a crucial role in the investment decision making. 

It is generally observed that Investors with risk apetite usually will go for low-price stocks while risk averse investors or investors with moderate risk appetite prefer high-price stock.

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