high priced and super high priced stocks – don't just ignore them
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3/8/2016 High Priced And Super High Priced Stocks – Don't Just Ignore Them...
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Nav 02, 2015 3865 Views Leave a Comment
High Priced And Super High Priced Stocks – Don'tJust Ignore Them...
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
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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.
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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 theshareholding is concentrated among a few investors, mainly long terminstitutional investors, making it difficult for operators to manipulate theirprices. Thus here, lack of liquidity is like a blessing in disguise.
Investing in high-priced stocks forces investors to carry out a more detailed
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analysis on them as they are just to buy 10-15 units considering an investmentof Rs. 1 Lakh.
By not splitting the stocks, the equity of these companies is capped, therebyreducing the supply of shares.
These pricey stocks make you a better long term investor. For example, if youhold are holding ‘just’ two stocks of MRF, it is very less likely that you will sell oneof them to free up cash for other investments which in turn makes you a goodlong term investor. On the other hand, say you would have been holding 1000stocks of Jaiprakash Associates Ltd., it was very likely that you would have sold300-400 of them to free up your cash for any other ‘tempting’ investment. I hopeyou understand this point very clearly as riding winners is a very importantquality 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!
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