It’s no longer enough to look at the fundamentals of a stock alone before investing; there is a link between the trading volumes of a stock and returns.
The biggest losers on the National Stock Exchange’s benchmark Nifty 50 index are stocks that have seen the highest turnover over the past 12 months, according a report by Morgan Stanley.
For instance, the shares of DLF, Reliance Capital, Reliance Communications, Reliance Infrastructure, Jaiprakash Associates and State Bank of India (SBI) have been the worst performers over the past 12 months. Shares of these companies have declined 38 per cent in the past year, while the Nifty 50 fell only 14 per cent.
Interestingly, trading velocity, a ratio of traded turnover to market capitalisation, is also very high in the worst-performing Nifty stocks, the strategy report says. Typically, high trading volume suggests speculative interest in a stock. In small-cap stocks, it would be a matter of concern as high trading volumes suggest speculative interests, explains Sankaran Naren, chief investment officer (equities), ICICI Prudential Asset Management, but in large-cap stocks it’s not such a big concern.
However, Ridham Desai, head of India equity research at Morgan Stanley, says, “The more a stock trades, the worse has been its performance.” For example, trading velocity in real estate major DLF has been 492 per cent in the past 12 months and its stock has slumped nearly 42 per cent during the same period. The others in the worst-performing list also have a high trading velocity — Reliance Capital (480 per cent), Reliance Communications (327 per cent), Reliance Infrastructure (303 per cent), Jaiprakash Associates (297 per cent) and SBI (256 per cent).
On the other hand, Nifty stocks where the trading velocity has been low have performed relatively better over the past year. For example, Grasim Industries (trading velocity of 34 per cent) and ITC (trading velocity of 38 per cent) have gained 2.06 per cent and 16.04 per cent, respectively, in the past 12 months.
According to Morgan Stanley, there are several stocks in the Nifty witnessing a churn in their free float every quarter or more frequently. “Twenty per cent of Nifty constituents churn free float (in) less than five months,” Desai says.
| HIGH-VELOCITY LOSSES (Figures in %) | |||
| Trading velocity | NSE share price returns | ||
| 1 year | 3 years | ||
| DLF | 492 | -41.79 | -51.89 |
| Reliance Capital | 480 | -50.68 | -68.55 |
| Reliance Communications | 327 | -51.45 | -78.36 |
| Reliance Infrastructure | 303 | -58.05 | -50.08 |
| Jaiprakash Associates | 297 | -42.28 | -21.65 |
| State Bank of India | 256 | -38.02 | 22.43 |
| Nifty |
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So, what does one make of these highly traded large-cap stocks? Experts call these momentum stocks, driven by news triggers and not only their long-term potential. “Most of the stocks with high trading velocity, which are also termed as momentum stocks, have fallen sharply in the past three years,” says Mehraboon Irani, principal and head, private client group, Nirmal Bang Securities. “At every sharp fall, people try to buy these stocks in the hope of making returns.
But, if you look at their performance over the last five years, they have only led to wealth destruction,” he added.
So why should investors know these data points? Fund managers say it’s becoming increasingly difficult to make money in the Indian equity markets as most of the front-line stocks are over researched and there’s limited opportunity in the price discovery process. It’s for this reason that data points like these become important. So rather than looking at only the fundamentals, fund managers are looking at volumes and the number of shares traded.
