ACC likely to outperform Ambuja Cements

Cement manufacturer ACC's stock is likely to outperform Ambuja Cements’ in the short term if one goes by the historical statistical pattern of 'normalised price ratio' between the two stocks. Normalised price ratio is arrived at by deducting the stock price of one company from other and indexing it to 100. When applied to two stocks in the same sector, it indicates the extent of the price gap between them over a period of time. In the past one year, Ambuja Cements has given 58.6% returns while ACC has provided 54.6%. As a result of this, the price ratio has diverged significantly from its average.

At present, the normalised price ratio between ACC and Ambuja Cements has expanded to a negative 3.61. In the last one year, average normalised price ratio between the two stocks has been a positive 5.85. In statistics, any deviation from average level should theoretically revert to average level, which is termed as mean reversion. In the case of ACC and Ambuja Cements, mean reversion is expected to transpire in the near term.

Over the last year, the price ratio between ACC and Ambuja Cements has turned negative on four occasions, and each time, it reverted to average levels in a few days. Given the current negative level of the normalised price ratio, a reversion to its mean value means ACC is likely to outperform Ambuja Cements in the near term.