A common saying says, “Don’t judge a book by its cover.” Similarly, “Don’t judge a stock by its share price. “ Investors often make the mistake of looking only at stock price because it is often the most visibly quoted number in the news.
However, the actual price of a stock means very little unless many other factors are considered. Only the certainty and quality of the earnings growth profile will determine the upside potential of a stock, irrespective of the levels at which it is currently trading.
A Rs 300 scrip may swell and be a Rs. 5000 scrip, whereas a Rs. 50 scrip may slide to trade to 5 Rupees. To conclude –Irrespective of the current market price, the fair value of a stock is a function of its earnings growth potential and valuation multiple, thereby determining the corresponding upside/downside.
E.g., Welspun Corp, from a 52-week high of Rs. 344.90, is down and now trading at Rs. 154.50 as of April 9, 2024 whereas Eicher Motors, from Rs. 1749, has catapulted to over Rs. 4251 over the last few years. Reliance Communications, from Rs. 734, is down to Rs. 1.85 in April 2024 today, whereas Maruti, from Rs.3621 in March 2016, has catapulted to over Rs. 12421.60 in April 2024.
So, the stock price should be independent of your stock-picking skills. The ability to understand businesses and their potential and what would be a fair valuation multiple, amongst many other qualitative factors, would help you understand the upside potential of a stock.
