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 financial press. However, the actual price of a stock means very little unless many other factors are considered.
It is only the certainty and quality of earnings growth profile which 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 have the potential of being a Rs. 5000 scrip whereas a Rs. 50 scrip may well 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.
Eg.- Over the last 5 yrs – Welspun Corp from Rs. 150/- is down and now trading at Rs. 85/- whereas Eicher Motors from Rs. 1700/- has catapulted to over Rs. 25000/- over the same period.
Over the last 5 yrs – Reliance Communications from Rs. 68/- is down to Rs. 19/- whereas Maruti from Rs. 1100/- has catapulted to over Rs. 7300/- over the same period.
Hence, stock price per say should have no bearing in guiding your stock picking skills. The ability to understand business and their potential and what would be a fair valuation multiple, amongst many other qualitative factors would all imply the upside potential.