Low-quality stocks trump better-quality peers in FY24, shows data

Companies that do not fall in either of 'growth' and 'quality' bracket have delivered median return of 65 per cent.

During this financial year (FY24), companies with weaker performance track record have outperformed those with stronger profiles by a huge margin, shows a study by PGIM India Mutual Fund (MF).

The fund house has said that the skewed rally has led to underperformance of active midcap and smallcap schemes in the near term.

Between April 2023 and February 2024, companies that qualify as 'high quality and high growth' in the NSE 500 index had delivered a median return of 36 per cent. In comparison, companies that do not fall in either the 'growth' or 'quality' bracket have delivered a median return of 65 per cent.

“There's an almost 30 per cent gap in the performance of high-growth and good-quality companies, and low-growth and low-quality companies. This is unprecedented,” said Vinay Paharia, chief investment officer (CIO), PGIM India MF.

 

This is in complete contrast to the long-term performances of both the segments of the market.

Companies with higher-than-average five-year compound annual growth rate (CAGR) sales growth were considered to be 'growth' stocks for the study.

Companies with higher-than-average five-year return on equity (RoE) were taken as 'quality' stocks.

Paharia pointed out that the trend is finally showing signs of reversal.

“In FY24 till February, low-quality and low-growth companies outperformed the better ones every month except for May. In March, there was a reversal. We think that there could be a rotation,” he said.