Low-Priced Stocks Shine In 2020
When it comes to investing there is a clear preference for low-priced stocks, at least when it comes to small ticket size investors. Shreya Chaware identifies how the low-priced stocks have performed in 2020 versus high-priced stocks while also analysing the pros and cons of basing one’s investment decision based on the ‘low price’ bias
The year 2020 has been good for some but quite frustrating for others. Unprecedented liquidity support and volatility hit the markets in 2020 and in the end those with conviction in equity emerged victorious. Even as there are many highlights worth mentioning about how the markets performed in 2020, it clearly was a year when the low-priced stocks managed to stage a decent performance. In the investing world, it is common to see investors with certain prejudices. Different investors have different perceptions and prejudices about the stocks market and the group of stocks that may outperform.
For example, many investors believe that low PE stocks are great for investments while some believe high RoE is great when it comes to choosing stocks for investment. The thing with any investment in financial asset is the emotional commitment. Investors tend to invest carrying a certain notion or a bias. For example, the notion that IT stocks always outperform when USD strengthens or PSU stocks are always highly undervalued, etc. With such pre-existing biases investors tend to invest in certain group of stocks and once the investment is made such biases increase greatly. With financial commitment there now is an emotional commitment.
Such prejudices are bound to happen even to the best of the investors in the markets. Often, successful investors are aware that such prejudices exist in the markets and that one must try as much as possible to maintain psychological balance by controlling oneself. One of the biggest prejudices carried by the investors is that low-priced stocks often tend to outperform the high-priced stocks’. Says Yash Desai, a market observer, “When I filter for stocks ideas, I always get excited whenever I see a stock quoting below Rs 100 per share. Of course the fundamentals matter, but the lure of investing in low-priced stocks is unbeatable.”
“I think it is more psychological than anything. The logic is simple: I can buy with Rs 10,000 almost 233 shares of CG Power, a cool 1,250 shares of Suzlon and only three shares of TCS. I would get more shares with similar amount of money and that to my mind plays an important role while making an investment decision. It is visually appealing. Plus, if you look at the history of the Indian stock market, some of the stocks like Eicher Motors, Havells, Berger Paints, Ashok Leyland and some others were, at a certain point of time, low-priced stocks! I also think that it is relatively easy for a low-priced stock to double in value when compared to a stock such as TCS which is a high-priced stock. I do not have enough research and empirical evidence to back up my argument but I think low-priced stocks as a group can deliver better returns when compared to the high-priced stocks.”
"There is no Holy Grail principally because market prices are determined by the attitude of investors and speculators to the changing economic and financial background. These attitudes tend to be consistent but occasionally are irrational, thereby defying even the most logical of analyses from time to time."
- Martin J Pring
Eicher Motors, Havells, Berger Paints, Ashok Leyland and some others were, at a certain point of time, low-priced stocks! I also think that it is relatively easy for a low-priced stock to double in value when compared to a stock such as TCS which is a high-priced stock. I do not have enough research and empirical evidence to back up my argument but I think low-priced stocks as a group can deliver better returns when compared to the high-priced stocks.”
Indeed, time and again it is seen that individual investors tend to have preference for investing in low-price stocks. But have the low-priced stocks as a group been able to consistently beat the high-priced stocks? If we consider the data for the year 2020, there is some evidence of low-priced stocks doing better than high-priced stocks. Low-priced stocks can be defined as stocks with prices less than Rs 100 per share. High-priced stocks can be termed as stocks with prices greater than Rs 1,000 per share. The table below highlights the performance of low-priced stocks versus the high-priced stocks in 2020 and clearly suggests that as a group penny stocks have fared much better in terms of average returns in 2020 when compared to the high-priced stocks.
Penny stocks considered for the purpose of the study are stocks whose prices are less than or equal to Rs 10 per share. Group of shares with stock prices in the range of Rs 10 and Rs 100 have also been able to beat the high-priced stocks in 2020.
On an average, the 1,030+ number of stocks that fall in the price category of Rs 10 to Rs 100 have managed to deliver close to 37 per cent returns in 2020. This is impressive average return performance when compared to the average returns delivered at just more than 13 per cent for those high-priced stocks that reflect stock prices greater than Rs 5,000 per share.
The average return delivered by the stocks that fall in the price category of Rs 500 to Rs 1,000 is a mere 18 percent. However, the stocks that traded in the range of Rs 1,000 to Rs 5,000 have been able to deliver an average return of more than 30 per cent in 2020. It is also interesting to note that the maximum numbers of shares are in the low-price category and that the maximum numbers of stocks that more than doubled are from the low–priced category. What is more interesting to note is the fact that none of the stocks with more than Rs 5,000 price per share has doubled in 2020 while as many as 10 stocks with stocks prices in the range of Rs 1,000 to Rs 5,000 have managed to deliver more than 100 per cent returns.
Not only have the low-priced stocks fared better than their high-priced counterparts, the recovery staged by the low-priced stocks since March 2020 has been much better in terms of returns at least. On an average, the low-priced stocks have gained more than 100 per cent be it penny stocks or stocks with price range of Rs 10 to Rs 100 per share. The recovery in the high-priced stocks has been muted when compared to the low-priced stocks as is seen in the table below even as the stocks with price range of Rs 00 to Rs 500 have managed to deliver more than 100 per cent on an average since March 2020 till the year end.
While the low-priced stocks staged a decent recovery in 2020 post March when the markets touched the bottom, one may assume that the fall must have been sharper in the low-priced stocks in 2020, and hence a sharper rebound. However, the data suggests otherwise. The low-priced stocks fell on an average by 32 per cent while the penny stocks on an average corrected by 20 per cent while the stocks trading in the range of Rs 100 to Rs 500 crashed by 39 per cent on an average. Interestingly, stocks trading above Rs 5,000 per share corrected by nearly 21 per cent. So, it was penny stocks and high-priced stocks with stock prices above Rs 5,000 which as a group managed to fall the least, relatively speaking.
From the given data it is easy to identify the fact that low-priced stocks have been able to beat high-priced stocks in 2020. But can we say that the low-priced stocks have consistently beaten the high-priced stocks? For that we have to look at some historical data. Taking into account the data for the past three years, we can say that a greater number of stocks that fall in the low price category have managed to more than double in a given calendar year; however, the average return for the low-priced group of stocks has been less than the high-priced stocks in 2019 and 2018. However, in 2017, the low-priced stocks clearly managed to impress investors with their returns while beating high-priced stocks by a good margin.
Are Low-Priced Stocks Riskier?
Low-priced stocks are often considered risky and whenever the liquidity dries up, low-priced stocks are the first ones to face the music. The perception about low-priced scrips is that they could be a value trap and that majority of them are low-quality stocks often lacking growth and earning visibility. On the contrary, whenever the liquidity is high, the low-priced stocks have a tendency to shine as the participation broadens and a majority of the low-priced stocks gain traction.
Normally, low-priced stocks are less liquid when compared to high-priced stocks. There could be some exceptions, as for example Idea is one of those low-priced stocks where consistently the volumes are very high in the counter. Applying technical analysis is very difficult in low-priced and penny stocks. With liquid counters, one of the biggest advantages apart from the liquidity is the ability to predict the price patterns with the help of technical analysis. With low or no volumes, the low-priced stocks cannot be studied in detail and hence attract less monies into it, thus making it an unattractive proposition.
Normally, low-priced stocks are less liquid when compared to high-priced stocks. There could be some exceptions, as for example Idea is one of those low-priced stocks where consistently the volumes are very high in the counter. Applying technical analysis is very difficult in low-priced and penny stocks. With liquid counters, one of the biggest advantages apart from the liquidity is the ability to predict the price patterns with the help of technical analysis. With low or no volumes, the low-priced stocks cannot be studied in detail and hence attract less monies into it, thus making it an unattractive proposition.
Conclusion
Equity investing is much more complex when one wants to work in the market with a fixed formula. One has to be flexible and at the same time one has to be as objective as possible and stick to the original investment plan. Because equity market is full of contradictions Investing is considered as an art as much as it is considered –Science. Even though statistically there is evidence that the low-priced stocks have a tendency to outperform their high-priced peers, it can be fatal to look at the historical data and make you investment decisions. Yes, low-priced scrips may have proven to be wealth creators that does not mean one has to ignore the stock just because it is high priced. One may have a bias towards low prices stocks however skewing portfolio too much in favor of low-priced stocks may lead to heavy underperformance.
Balanced approach is required when it comes to choosing stocks between low-price & high price. Valuation is very important and fundamentals need to be studied before making investment decision.
The trick is to pick the fundamentally qualified stock with earnings visibility that is trading below 100 while not ignoring lucrative buys that may be trading at prices greater than Rs 100 per share (high-priced shares). The price fluctuations will be determined by the hopes, fear and expectations of the market participants. Most individual investors hope and expect that the low-priced stocks may double faster than its high-priced counterparts. If one gets an opportunity to buy a quality low price stock one can accumulate the same with a hope to see the stock turn into a high price stock over the years !