Look at a high-value stock from an investment point of view rather than from a trading perspective because of low liquidity.
The year 2017 has been lucky for old as well new investors as benchmark indices have already given a return of over 17 percent so far. But, the story is worth talking if you are an old investor and followed ruled of value investing.
Old-school companies have given a return of up to 5,000 percent in the last five years and are now trading over Rs10,000 per share. For some, this price tag could be termed expensive, but merely price is not the sole criteria to determine valuations.
“High-value stocks may not always be expensive just like penny stocks may not always be cheapest or best choice to buy. One has to do careful analysis based on fundamental research before making an investment decision,” Alok Ranjan, Head of Research, Way2Wealth Brokers Pvt. Ltd told Moneycontrol.
A stock like MRF which rose nearly 600 percent in the last five years now costs over Rs 70,000 per share. An investor could buy a two-wheeler or a motorcycle for the same amount.
Polson which was a three-digit stock five years back now trades at Rs11000 a piece. The company Asia’s largest manufacturer of vegetable tannin extracts and toll manufacturer of synthetic tanning agents, fat liquors and intermediates for the leather chemical industry.
“Looking at high-value stocks just on the absolute price may not be the correct way to look at the stocks. For Ex. MRF trading at an absolute price of Rs 73,000 may mean to spend a lot of money on buying a single stock and it may sound like an expensive stock, however it is trading at the PE ratio of 21x of its FY17 earnings which are in line with its peers,” Shrikant Akolkar, Sr. Equity Research Analyst, Angel Broking Pvt Ltd told Moneycontrol.
“Same goes with Eicher Motors which has a single share valued at Rs 29,300 but its PE ratio on FY17 earnings works out to be 47x, which is at a premium to its peers due to its superior margins and strong growth record,” he said.
How to make an investment decision?
Well, just looking at the price tag investors should avoid term high-value stocks as expensive stocks. The attention should be on valuation than the price because if the conditions remain favourable, these stocks will continue to provide good returns.
A high-value stock should be looked from an investment point of view rather than from a trading perspective because of low liquidity. If the company’s fundamentals are strong and valuations continue to be attractive, then it is best to remain invested in the stock, suggest experts.
“Selling or holding on to a stock depends upon the investor’s comfort with the same. In our opinion, the way to look at any high-value stock is to look at any stock from an investment perspective,” Prasanth Prabhakaran, Sr. President and CEO, YES Securities (I) Ltd told Moneycontrol.
“If the company’s fundamentals are strong and valuations continue to be attractive, then it is best to remain invested in the stock. Liquidity is a risk factor and has to be taken into account but cannot be the only reason for selling a stock,” he said.
However, if the fundamentals do not support the current valuations, investors will be better off booking partial profits. One should look at the business fundamentals and valuation before prematurely booking profit in scrips, suggest experts.
“The advice is to monitor the valuation and business and book profit if the valuation is unsustainable or business conditions are deteriorating,” Akolkar of Angel Broking said.
Potential stock split candidates?
Companies go for stock splits when the value of the share becomes slightly elevated and trading volumes start to reduce. Stock split helps the companies to bring down the value of the share by half or even one-third depending on the split ratio.
In a stock split, the number of outstanding shares increases but the total value remains the same. The most common split ratio is 2:1 in which a shareholder would get 2 shares for every share held.
“In many cases where stock prices go up, a company decides to go for a stock split to maintain liquidity and keep it within reach of small investors. That way it is quite likely that many of the stocks mentioned in the list may go for a stock split,” said Ranjan.“While saying this one must understand that some of the managements like MRF have consciously followed a no-bonus and no stock split strategy since inception,” he said.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.