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Less popular stocks do better than the ones brokerages recommend

NEW DELHI: If you thought most popular stocks generate best returns, think again.

An analysis by domestic brokerage Motilal OswalBSE 0.69 % shows contrarian bets are best if one is looking for crazy returns, while neutral-to modestly popular stocks tend to offer better returns compared with the popular names. Or, at least that has been the trend in last one decade.

The brokerage defined ‘popularity of a stock’ based on consensus view, which was the aggregate of ‘buy’, ‘‘hold’ and ‘sell’ calls from various brokerages.

“Neutral to moderately popular stocks deliver significant outperformance, even bettering the most popular stocks,” Motilal Oswal Securities said in a thematic report.

The brokerage came into this conclusion after dividing BSE100 stocks into five groups based on popularity

The chart suggested that 20 most popular stocks managed to deliver over 14.8 per cent CAGR over the past one decade, while the neutral-to-modestly popular stocks offered 16 per cent return CAGR in this period. The benchmark BSE100 index saw 10.2 per cent surge in value during the same period.

“Besides the superiority of neutral to moderately-popular stocks, we have established that the most popular and second-most popular stocks usually beat the benchmark,” the brokerage said, adding that “As popularity is an aggregate measure of sell, buy and hold recommendations, and it conveys more information than sell/buy recommendations. Consensus sell recommendations, with their scarcity value, are better predictors of stock performance than buy recommendations.”

Best returns
The brokerage noted that a simple strategy of investing in stocks for which analyst consensus has changed from “net sell to net buy” with a holding period of one year has delivered 24.1 per cent (CAGR) in annual returns over the last 10 years.