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

Dalal Street Investment Journal - - SPECIAL REPORT -

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 ₹1,000 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 ₹1000 stands at an im­pres­sive 50 per cent on a YTD ba­sis, which is sig­nif­i­cantly higher than 27 per cent, which is the av­er­age re­turns

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