From the start of this year till the end of August, the Sensex has fallen more than 1810 points or 6.5% due to various reasons including global crisis and the China slowdown. But from September, it started showing signs of recovery gaining a handsome 1550+ points in just 57 days thereby making it a modest 0.92% downfall overall. Last year, the Sensex witnessed a bull run thereby gaining a herculean 30.08% as against this year’s negative 0.92%.
As stock market continues its latest uptrend, we take a look at one of the most undiscussed sections of the stock market – ‘Are High Priced Stocks Worth Buying?’ Most of the people, including you and the old-me have been reluctant in investing in ‘expensive’ stocks. Fundamentally, a stock is expensive if it is trading way above the standard P/E when compared to its appropriate peers or is simply overvalued because of short term sentiments. But the way a naïve investor sees it is, anything trading above say 1500 or 2000 is expensive and she or he’d rather buy 100 shares of company A than 10 shares of company B. Note that there is a huge difference between expensive and pricey.
So amidst this volatile and one of the fastest growing markets in the world, if you are the one that deliberately shuns pricey stocks and chases pennies, STOP and take a step backward. Looking at a company’s stock price is a horrible way to determine if it is trading at an overvalued price. It might take you for a ride when you’ll realize that the top 10 most expensive stocks of the Indian market beat the Sensex by a whopping 132.36% in terms of growth from the start of January 2014 till 27th Oct, 2015. They are as follows:
Say you had a corpus of Rs. 1 Lakh on 1st January, 2014. What are the chances you would have invested in Bosch or MRF? Considering the fact that they was trading in the Rs. 10k-20k range, you would have ended up with not more than 5-10 shares of those companies. Not much right??? You could have purchased an iPhone 6s along with an LCD TV with that amount. Or you could have purchased more than 1800 shares of Jaiprakash Associates Ltd. which was trading at Rs. 55.50 during the time. Just for your information, Jaiprakash Associates Ltd. is now trading at Rs. 13.50 thereby witnessing a 75.67% fall whereas MRF is trading above Rs. 41500 with a 115% gain. This proves that inspite of intimidating prices, these shares have been extremely rewarding over the past 650-700 odd days. The examples considered above come into the Super High Priced category. People even hesitate to buy the 1000-1500-2000 category.
We have recommended quite a lot of stocks in this range including Wim Plast Ltd., Bayer Cropscience Ltd., Atul Ltd., SRF Ltd., Tech Mahindra Ltd., etc which have increased their value handsomely over the time. Let us understand one of these examples, say Wim Plast Ltd. which was recommended as a BUY on 28th April, 2015 and profit booked on 10th August, 2015 thereby gaining close to 100% in just 100 days!
Wim Plast Ltd. is the part of Cello group India and has been marketing all its products under brand name Cello and had substantially increased the market share to 12% in the plastic furnishing market during the time. Apart from the strong brand that it was leveraging, it had the advantage of strategically located manufacturing plants, a diversified product portfolio complimented by strong financials. The reason for mentioning these points is that one should utilize their time in analyzing these fundamental factors rather than searching for low priced stocks.
So by now, I hope that you have accepted the fact that it is foolish to simple ignore these stocks just because you cannot but them in bulk. Percentage change is what matters and not the actual change in price. Enough with the examples, now let’s understand some of the softer elements of investing in these types of stocks. They are crucial when it comes to decision making:
- Firstly, they are far less volatile as compared to their less pricey peers as the shareholding is concentrated among a few investors, mainly long term institutional investors, making it difficult for operators to manipulate their prices. Thus here, lack of liquidity is like a blessing in disguise.
- Investing in high-priced stocks forces investors to carry out a more detailed analysis on them as they are just to buy 10-15 units considering an investment of Rs. 1 Lakh.
- By not splitting the stocks, the equity of these companies is capped, thereby reducing the supply of shares.
- These pricey stocks make you a better long term investor. For example, if you hold are holding ‘just’ two stocks of MRF, it is very less likely that you will sell one of them to free up cash for other investments which in turn makes you a good long term investor. On the other hand, say you would have been holding 1000 stocks of Jaiprakash Associates Ltd., it was very likely that you would have sold 300-400 of them to free up your cash for any other ‘tempting’ investment. I hope you understand this point very clearly as riding winners is a very important quality to have in you if you are in for the long haul.
Remember, just because a stock is pricey, doesn’t mean it is avoidable. If it is pricey, it is so for a reason. Look at its P/E ratio. If it is in the same standard range of the industry, that stock is definitely worth further analysis. Understand this with MRF Ltd. which reported a net profit of 908.32 Cr for the year ended September 2015 and has an equity share capital of Rs. 4.24 Cr.
So you can see that it the share price did not affect the P/E and as we have been saying all along, dig deep before you come to conclusions like avoiding MRF and likewise. The stock being pricey doesn’t change its P/E ratio and eventually the valuation. Not that we are against low or moderately priced stocks, but make sure that you don’t miss out on these jewels just because they are pricey on paper… Happy investing!