Myth of High priced stocks

Apurva Sheth
Last time I spoke to you about the purpose of our (Daily Profit Hunter's) existence in response to a question that our reader Mr. Nilesh Doshi had raised on one of my earlier article on Warren Buffet's advice for Traders

Another reader Mr. RS Rathore was convinced of the reply that I gave but he raised another question. But before I come to that I would like to brief you about Mr. Rathore. A few weeks back he shared his experience of incurring great financial loss by ignoring stoploss mechanism. I wrote an article about your views on stoploss and how we can learn from others mistakes. I recommend everyone to read this article in case you have missed it.

Apart from being a reader of the Daily Profit Hunter newsletter Mr. Rathore is also a subscriber of Swing Trader. He was not very happy to receive a stock recommendation from me because the stock was too 'expensive' for retail traders like him. He felt that this stock was out of reach for him and suggested to recommend stocks which were not priced so high.

This is one of the most common myths that most retail traders believe in; apart from many others and so I would like to deal with this head on. Our friends at Equitymaster have already dealt with this topic from a fundamental perspective, so I'm not delving much into detail on it but if you haven't read their views on it then I strongly recommend to read this article - Are 'high price' stocks 'expensive'?

Today, I want to show you how I look at high priced stocks from a technical standpoint. Just have a look at the table that I have attached below. The table consists list of stocks that were trading above Rs 3,000 as on 16th April 2015 along with its Beta and shareholding percentage (%) patterns across different groups. The group (A) includes percentage shares held by promoters and promoter group entities, group (B) includes percentage shares held by Institutions both foreign and domestic. These includes institutions like foreign institutional investors (FIIs), Mutual Funds, Insurance Companies, Pension Funds etc. Group (C) lists the sum total of (A) & (B). Group (D) is the percentage shares held by Non-Institutions which mostly comprises of HNI's and retail participants.  Group (E) is the sum total of (C) & (D) which is mostly 100%. 

High Priced Stocks
Company Name CMP Beta (%) Share
held by
Promoters
(A)
(%) Share
held by
Institutions
(B)
(%) Share
held by
Promoters
& Institutions
(A)+(B)=(C)
(%) Share
held by
Non-
Institutions
(D)
Total
Shareholding
(C)+(D)=(E)
3M India Ltd. 8,681 0.89 75.00 12.77 87.77 12.23 100.00
Abbott India Ltd. 3,981 0.26 74.99 8.15 83.14 16.86 100.00
Bajaj Finance Ltd. 4,585 0.71 61.61 19.38 80.99 19.01 100.00
Bayer CropScience Ltd. 4,146 0.89 68.96 19.42 88.38 11.63 100.00
Bharat Electronics Ltd. 3,299 1.19 75.02 18.82 93.84 6.16 100.00
Blue Dart Express Ltd. 6,469 0.57 75.00 13.29 88.29 11.71 100.00
Bosch Ltd. 26,240 0.73 71.18 19.79 90.97 9.03 100.00
Dr. Reddys Laboratories Ltd. * 3,680 0.42 25.49 44.19 69.68 12.91 82.59
Dynamatic Technologies Ltd. 3,478 0.95 51.13 22.25 73.38 26.63 100.00
Eicher Motors Ltd. 15,837 0.93 54.98 28.14 83.12 16.88 100.00
FAG Bearings India Ltd. 4,443 0.71 51.33 22.53 73.86 26.14 100.00
Gillette India Ltd. 4,749 0.46 75.00 8.59 83.59 16.41 100.00
Glaxosmithkline Consumer Healthcare Ltd. 6,377 0.37 72.46 12.95 85.41 14.60 100.00
Glaxosmithkline Pharmaceuticals Ltd. 3,313 0.18 75.00 11.35 86.35 13.65 100.00
Grasim Industries Ltd. * 3,730 1.15 25.51 39.76 65.27 20.26 85.53
Honeywell Automation India Ltd. 8,544 0.88 75.00 15.09 90.09 9.91 100.00
ICRA Ltd. 4,744 0.58 50.06 34.29 84.35 15.66 100.00
Kirloskar Brothers Investment Ltd. 4,088 0.41 72.24 8.43 80.67 19.33 100.00
Lakshmi Machine Works Ltd. 3,875 0.60 28.35 27.95 56.30 43.70 100.00
Maruti Suzuki India Ltd. 3,678 1.00 56.21 36.86 93.07 6.94 100.00
Monsanto India Ltd. 3,122 1.10 72.14 4.98 77.12 22.87 100.00
MRF Ltd. 41,560 1.07 27.22 18.12 45.34 54.65 100.00
Nestle India Ltd. 7,027 0.47 62.76 18.51 81.27 18.73 100.00
Oracle Financial Services Software Ltd. 3,421 0.48 74.52 14.51 89.03 10.98 100.00
Orissa Minerals Development Company Ltd. 3,146 1.29 50.01 17.80 67.81 32.19 100.00
Page Industries Ltd. 13,413 0.17 51.00 38.84 89.84 10.15 100.00
Procter & Gamble Hygiene & Health Care Ltd. 7,148 0.44 70.64 13.37 84.01 15.99 100.00
Sanofi India Ltd. 3,387 0.27 60.40 29.07 89.47 10.53 100.00
Shree Cement Ltd. 10,452 0.59 64.79 16.88 81.67 18.33 100.00
Solar Industries (India) Ltd. 3,751 0.76 72.91 18.86 91.77 8.23 100.00
Tide Water Oil Company (India) Ltd. 16,058 0.80 26.22 11.21 37.43 62.57 100.00
TTK Prestige Ltd. 3,779 0.86 70.37 20.89 91.26 8.74 100.00
United Spirits Ltd. * 3,817 0.46 58.87 28.18 87.05 12.47 99.53
Wabco India Ltd. 5,684 0.60 75.00 10.98 85.98 14.02 100.00
Average 0.68   60.33 20.18 80.52 18.53  
Source: - ACE Equity, * Remaining shares held with Custodian

Now let's look at some of the key findings from this data.

The first thing that one would notice when glancing through charts of such high priced stocks are they tend to be less volatile compared to the market. To check this, I have calculated the Beta of stocks returns and measured their sensitivity to market returns which is nothing but NSE-Nifty daily returns for last one year.

A beta above one generally means that the stocks is both volatile and tends to move up and down with the market. A beta below 1 indicates that the stock is less volatile than the market.

Most of the above stocks have beta lower than 1. To be precise only 6 stocks out of the above 34 have a beta of 1 or above. The average beta of these stocks is at 0.68.

Now let's check what could be the possible reason for these stocks having a low beta.

In the adjacent column (A) you can see the percentage shares held by promoter and promoter group entities. Most of these stocks have a very high promoter holding. 16 out of these 34 companies have a promoter holding of more than 70%. The average percentage shares held by promoters is 60.33% which is fairly high.

The column (B) list percentage shares held by Institutions like Foreign Institutional Investors & Domestic Institutional Investors. Institutional shareholding is fairly spread out across companies. Most of them own anywhere in the range of 10% to 20% in these companies. The average percentage shares held by institutions is 20.18%.

Group (C) lists the sum total of Promoter holding (A) & Institution holding (B) in these stocks. The average shares held by both of the above groups in these companies is 80.51%. This is a significantly large number. This becomes more important because I think that these are the groups who are in the stocks for a long term. Promoters are strategic investors and will not frequently sell their shares in the open market. The Institutions also follow a similar path and won't participate frequently in the markets and whenever they do, the change of hands will be mostly from one institution to another. This results into a lower beta for these stocks as majority of the shareholders are holding stock from a strategic perspective and long term point of view and do not sell shares when the markets go down. Thus, the 'actual' free floating shares in the market are very less.

This leaves us with only one group to deal with and that is the Non-Institutions (D) which holds about 18.53% of these companies on an average. The non-institutions mostly comprise of HNI's and retail players. In some of these stocks even the HNI community (individuals holding above 1%) hold substantial stakes and don't offer their shares frequently in the market.

After all of this what is actually left is very little number of shares that the 'retail' public can deal in. This results into too much money chasing too little stock. This reminds me of the age old economic principle that I spoke to you earlier that for a stock's price to go up its demand should be higher than its supply or simply put more buyers than sellers which is the case all the time with these high priced scrips.

Next thing that I look for is that whether there is more enthusiasm amongst buyers to get in to the stock at this point of time. Technical Parameters like Volume, Trendline or Price Pattern Breakouts gives me these indications.  

When both these things merge, it's an excellent setup for a long trade. So instead of shying away I would be more than willing to pick such stocks and recommend them to Swing Trader subscribers.

Do you generally avoid buying High Priced stocks? Share your views in the Club or share your comments here.

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12 Responses to "Myth of High priced stocks"
Dinesh Kumar Sharma
27 Apr, 2015
Good advice.Like 
knair
26 Apr, 2015
Beta of high priced stocks will be low, no doubt, because it is not attracted by many traders due to high price and less traded volume. When promoter holds more than 70%, and both FII and DII covering upto 20%, what is left to public is very little. That itself shows less trading volume. So beta quite within the limit. The other point is that beta is linked to market fluctuations. When the market goes up too high, even the promoters and institutions go for selling their holding, resulting in to sudden fall of prices. These high price is more susceptible for huge fall (see beta at that time). When they fall very badly, the promoters and institutions will be in the Q to buy back the same. In other words, retail investors will be left out, ignorant of all this. There are A grade stocks whose beta is less than 1 and the price range seems to be unmoved for years. We cannot make money in them. However, the smart investor will buy high priced stocks when the market is crashed and will sell them when the market is peaked. This type of buy/sell is what Buffet style is all about. Whoever do it needs not to think about beta. The market will teach us this. Like 
K.Venkatasubbu
25 Apr, 2015
Apurva Sheth has got comprehensive strategies and explain them very nicely. This strategy of selecting the stock with a high promotor/FII/DII stake and low beta acts as a very good first level filter what I understand from going through this article. I am more than convinced that his strategies really will pay off through his swing trader recommendations once the market reverses the current trend. All the best to him and in turn to us, the swing trader subscribers.Like 
n.h.panduragi
20 Apr, 2015
The promoter group and professional bulls and bears are capable of creating a herd mentality in the market. The Promotor group who know that very few outside sellers exist can go on offering higher and higher rates to diminish floating stock to induce more and more new investors to buy @ very high prices. After the promoters' targeted price arrives they can unload most of their holdings and generate a shocking crash in the market any time. It is a well known fact that if some one like a promoter goes on buying in a rising market his average cost turns to less than market price and he can choose when to unload his holdings especially if he belongs to promoter group.. Like 
Swaminathan
19 Apr, 2015
You hit the nail on the head - explained logically with the data. Now it is easy to convince my wife :) Like 
saby
18 Apr, 2015
I dis-agree with you on this subject. i have noticed that the value of all these shares mentioned in the list do go down when the market goes down and as the market is on a bull run as of now the value of these stocks are also near its peak value. So how do you justify to buy any of these shares at their present value as no one knows when and where the sensex/nifty is going up to!! Going by the performance of the new govt, which has not done anything substantially( although all of us had much hopes for some action time) since taking over the power for justifying the sensex/nifty to come to this level!!Like 
PRABAKARAN B
18 Apr, 2015
I simply agree with u.ur explanation is thought provoking and to the reason. Thank u for the valuable information.Like 
Pankaj Gupta
18 Apr, 2015
A very good analysis and a convincing viewpoint. I think that while trading such a stock, the entry price would be important, for the price pattern may ensure quite a bit of fluctuation in a short period.Like 
Tejinder
18 Apr, 2015
Yes. I feel there is a tendency to avoid high price stocks. When one buys 1,5 or 10 odd shares, that underlying feeling is there of not having enough! In actuals the value of 10 shares @ 3000 also works out to 30k. Unfortunately the mind is concentrating more on the 10 rather than the 30k. So, I feel there is this tendency. Like 
Vijay Chandar
18 Apr, 2015
I am not sure whether stock price is very relevant as long as (1) the % of the corpus for the trade and (2) the risk for the trade are within predeterned parameters and the expected returns are as per the goal. I do have a question on the relevance of low "beta" stocks, whose prices do not move sharply during a short time, for technical trading where the horizon is much shorter.Like 
sanjoy das
18 Apr, 2015
Great comparison. Particularly showing us percentage investment by different buyers. Why this stocks are so highly priced. In future their prices will go further high I believe so.Like 
bbpattani
18 Apr, 2015
An investor is reluctant to invest in such high priced shares. Even a small investment can lead to a loss of a few thousands when market falls This phase is very unusual after Mr.Mody became P.M. No one had thought that Bosch will touch 26000.00 of symphony or Ajanta Pharma or lupin or NBCC will scale such high price. (I think youmust also not have imagined).So to invest at such high prices will be foolish unless you have inside information @ high dividend or bonus or rights etc. A common man is unable to know why the price goes up or down. Say BF Utilities..no profit,no dividend and still it is 800.00+. Why? There are many such stocks. So he goes to his broker or any advising agency to guide him for investment. (HBJ Capital, Excel stock research, and many are there) They claim good result if two or three scrips go up but do not mention @ other scrips which have gone down. It is the investor who is losing money. If you listen to CNBC Awaz Q & A session most of the investors are making loss in their investment. So whom to believe? or is it better to have your money in FDs and make 8 to 9% income. But hum,an nature is such that he runs for more profit. He thinks that other are making profit and he is not making so he goes again for investment and burns his fingers. Stock market is a tricky business and it is more difficult to find a good, genuine adviser. Hope I am not very sarcastic. Forgive me if I am. I try to do my own research, invest in good div. paying cos. and try to make a little money.(Indiabulls security..giving Rs.4.00 div. every year (FV1) or Hinduja Global giving Rs.20.00 every year or colgate which has already given Rs.27.00 as div. Supreme Industries excellent div. Surprisingly on TV channels no one mentions of Div. income of good cos. I think it is a long letter.Can you advice on Marksand Pharma. Is it a good investment at Rs.66.00? Last year it was 12.00 Regards. B.B.PattaniLike 
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