Return-hungry investors had invested heavily in midcaps in 2017, but the recent correction saw it underperform its largecap peers in the last one-year. If we look at a five-year period, midcaps have outperformed largecaps by nearly 80 percent.
Midcaps have struggled over the last few months, resulting in underperformance versus largecaps. Over the last 12 months, midcaps have delivered 12 percent returns as against 15 percent for the Nifty. However, the outperformance rises 79 percent over a five year period.
In April, Nifty Midcap-100 index was up 8.2 percent year-on-year (YoY) as against a 6.2 percent YoY rise for the Nifty. “Midcaps traded at a 23 percent premium to the Nifty in terms of P/E.” This experts said resulted in a double-digit correction in some of the counters.
As many as 15 midcaps rose by 50 percent to 136 percent in the last one-year. These include: Jindal Steel & Power, L&T Infotech, Ashok Leyland, Tata Global Beverages, Divi’s Laboratories, 3M India, Biocon, Mphasis, Page Industries, Future Retail and Gruh Finance.
A large part of the underperformance in the midcaps space can be attributed to profit-booking, especially after the stellar run seen in 2017. “Some of these high valuations got corrected when markets fell in February and March. Post that correction, some midcaps have started to come into an attractive valuation zone.
Sounding a cautionary note, he said investors should focus on quality companies with strong earnings be it largecaps or midcaps.
Are companies quoting a high P/E ratio a cause for worry?
Below is a list of companies that have outperformed the Nifty in the last one-year, returned over 50 percent, and trading at a high price-to-earning (P/E) ration when compared to the industry.
Experts suggest that investors should not look at P/E alone. “Earnings growth eventually drives the stock price along with general acceptance and consensus among investors.
But, Pritam Deuskar, Fund Manager at Bonanza Portfolio, said that many times a value investor get caught up just looking at only one or two valuation parameters and ‘create a mental hurdle against buying a stock’.
Are midcaps losing sheen?
Midcaps have corrected slightly this year as against an about four percent decline for the BSE Midcap index. Experts feel it is too early to say if midcaps are losing sheen or if the time has come to book profits and shift towards largecaps.
One of the reasons which resulted in muted performance from this space was a reshuffling of the midcap portfolio due to new mutual fund classification norms introduced by market regulator SEBI last year.
So, what should investors do now?
Valuations of some midcaps may be higher because there could be a case of smart money chasing a handful of quality stocks. Most of the stocks mentioned in the list above find favour with market experts as these are high-quality stocks with strong business models and in some cases have low debt on their books.
If you look at the outperformers, these are high-quality companies with robust business models. In most cases, the P/E is higher because the market is a lot more selective in case of midcaps and accords higher P/E to robust business models and high growth stories,
He added that most midcap companies have benefited because they are less diversified and have much lower debt. Hence, higher P/E may not exactly be a cause for worry.
Bonanza Portfolio’s Deuskar said investors should look at the certainty and quantity of growth rate. “It differs sector-wise in cyclical or commodities where even 10 P/E is high or above appropriate. In finance, you value them with a price to book along with changes in return on equity and loan book growth.
He likes Ashok Leyland, 3M India, Page Industries and Gruh Finance from the above list.
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