Post a considerable fall in midcaps, there is a very strong case for value buy in the entire mid-cap space. However, investors need to be careful and cautious while selecting stocks with a focus on quality management and growth visibility.
Despite our stock markets notching record highs, the broader market (most of the midcap and smallcaps) has failed to participate in this bull run.
The recent underperformance of broader markets can be attributed to many reasons such as higher valuations, many of the fundamentally strong midcap companies included in the ASM framework and auditors pull out etc.
If we consider the valuation part only, the strong out performance earlier had resulted in stretched valuations for mid-caps and a meaningful correction was long overdue.
The rally in this space was so sharp that it resulted in mid-cap valuations rising to almost 35 percent premium against the large-caps early this year.
Therefore, some correction was due which has happened and turned overall markets healthy from a long-term perspective. Small and mid-cap stocks have outperformed large caps in the last few years before the correction that triggered in January 2018 mainly due to rise in crude oil prices and tightening of monetary policies in US and India.
The carnage in the broader market has turned valuations attractive and opened up several value-buying opportunities. Both BSE Midcap and Small-cap indices are currently trading at 13-17 percent below their recent highs and in some cases, stocks have corrected by more than 50-60 percent respectively.
Such declines have generated opportunities for buying into selective good quality midcap stocks where earnings visibility is stable and high.
One-year forward price-to-earnings (PE) ratio of BSE Midcap is currently at 23.3 times, a premium of 14.8 percent over the Sensex which trades at 20.30 times, according to Bloomberg data.
However, on January 1, the mid-cap index traded at 23.65 times one-year forward P/E, a premium of 27.29 percent on Sensex which was almost double to present premium.
Now, post this considerable fall in mid-caps, there is a very strong case for value buy in the entire mid-cap space. However, investors need to be careful and cautious while selecting stocks with a focus on quality management and growth visibility.
At the current juncture, as the benchmark indices are notching record highs, there is a strong possibility that markets may get polarized. It is also a fact that we are in an election cycle and election brings uncertainty with itself.
The last thing which market participants generally like to deal with is uncertainty that ensures high volatility despite no major change in underlying fundamentals.
So, it is prudent not to invest aggressively or chase stocks which are showing momentum as valuations are indeed stretched.
The markets will give the opportunity to enter into dips, so one should brace well to weather any sort of volatility and should use the panic to buy. Going by the Q1 performance of the companies across sectors, most of them have matched to our estimates.
Many stocks from the broader market, which have fallen due to above-mentioned reasons, have reported very good financial performance.
There is certainly a strong buy case in a lot of such midcap and small-cap stocks which have been corrected due to stretched valuations or inclusion in ASM and general market sentiment etc.
MORE WILL UPDATE SOON!!
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