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Should a stock's price determine its attractiveness?
Tue, 26 May Pre-Open

Indians by nature are very price conscious. While this trait is good but blindly following prices without doing the corresponding benefit analysis can be risky. Even in case of stocks, retail investors prefer buying low priced stocks as compared to stocks trading at over Rs 10,000 levels. And the rationale followed is that as more number of shares of a low-priced stock can be bought it will fetch higher gains. But nothing can be far from truth.

For example an investment of Rs 20,000 will fetch 200 shares of a company A that is trading at Rs 100 per share as compared to 2 shares of company B that is trading at 10,000 per share. But if both the stocks are expected to rise by 20% in the next one year then in both the cases the total investment of Rs 20,000 will deliver an annual return of 20% irrespective of the number of shares held.

Therefore, while deciding to invest in a particular stock; one should not get carried away by the price but rather look at the fundamental potential of the company to deliver returns. This will ensure that financially strong stocks are not missed as a result of the price factor. For example, largest tyre company MRF was trading at Rs 10,000 three years ago. However all logic of the stock being pricey seems to have turned on its head as its price has appreciated more than threefold during this period translating into compounded annual gains of over 50%.

Apart from MRF, a host of companies such as Bosch, Eicher Motors, Page Industries and Shree Cements have gained handsomely in the last three years and are trading at more than Rs 10,000 levels. And the common thread running through these companies is that each of them has a sustainable moat. While MRF and Bosch enjoy leadership positions, Eicher Motors and Page Industries are equipped with strong brands and Shree Cement has the advantage of being a low cost producer.

Thus, the price level at which a stock should be considered for investment holds importance only for calculating the return expected from the stock over its holding period. Blindly looking at low price levels to invest in cheap stocks is a gamble where investors face a possibility of getting trapped in dud stocks and losing investment.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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