Do Low Price Scrips Deliver Higher Returns?

Lay investors fall for low price scrips probably assuming the low cost will fetch them returns that are higher than high price stocks. So which one is better? DSIJ Team digs out the facts to find the answer for you.

For ages, retail investors, not only in India but across the world, have shown their fascination for low price scrips. Indeed, the lure for low price scrip is tempting for small investors as the underlying notion is that a low price scrip grows faster and hence wealth is created at a faster rate. 

To put things in perspective, we thought of studying the stock price performance of low price scrips and high price scrips for the current year on an absolute basis. Markets are scaling new highs and the macro-environment has never been this good for markets. Global markets too are on a high, with major benchmark indices touching new peaks. In such a scenario, stocks across market capitalisation tend to perform well and cross their 52-week highs or trade close to their 52-week highs. 

For the purpose of this study, we wanted to check how many shares are trading near their 52-week highs in the current market. We selected top 1,000 companies based on market capitalisation for our study and filtered the companies that have regularly reported ROE for the last five years (including ROE for year ended March 31, 2017). After applying this filter, we had 653 companies left for analysis. The companies were segregated into four categories based on their current share price. 

We wanted to see the average returns generated by shares within these four price-band buckets, for which we calculated year-to-date (YTD) returns of each stock and then calculated average returns within each category. 

It is interesting to note that almost 83% of the companies having share prices above Rs1,000 are trading between 80%-100% range of their 52-week highs. Such a high percentage of shares that are trading close to their respective 52-week highs indicates that the market rally is broad-based. 

Another important aspect that gets highlighted here is that the average returns for the scrips with their current market prices higher than Rs1000 stands at an impressive 50 per cent on a YTD basis, which is significantly higher than 27 per cent, which is the average returns delivered by scrips whose current market prices are below Rs100 per share. It is interesting to note that for companies trading in the price band of Rs1-100, only 42% of the companies are trading close to their 52-week high. This indicates that among the small price stocks, this run up has not happened. 

Taking a look at the performance of shares in the price band of Rs501-1,000, 79% companies are close to their respective 52-week highs. The YTD numbers suggest that maximum price appreciation has happened in the Rs500-1000 price range and the average increase is ~57%. This is closely followed by shares having prices above Rs1000. Thus, lowest price appreciation has happened in shares trading within the range of Rs1-100.

This observation goes to show that it may not always be a good idea to look at low price shares for outperformance as the data suggests that the outperformance on YTD basis has happened in stocks with prices higher than Rs500.

Investors are better off looking at the quality of the management, business model, dividend distribution policy, consistency in growth and such other parameters that indicate the management bandwidth and product/service quality of the company rather than simply focusing on low price scrips.

"The bias of buying a low price stock will lead to a portfolio of junk stocks. The worst observation is that retail shareholding actually goes up in companies where prices fall and come down from 3 digits to 2 digits to 1 digit. An example would be to look at how retail shareholding increased in a big way in Kingfisher Airlines and other infra names all the way till the bottom. 

Money can be made provided one has done some basic research on the company based on fundamentals or technicals and not just because a stock is trading in two digits"

- Nooresh Merani, Investment Advisor