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Looking to create wealth? Stay with small & midcaps in 2021, 18 stocks to buy

From a valuation perspective, the midcaps look attractive vs largecaps. On a two-year rolling returns basis, the market has turned in favour of small and mid-cap stocks which are more reasonably valued.

November 27, 2020 / 02:37 PM IST

Small & midcaps, which outperformed benchmark indices in the calendar year 2020, have not lost their sheen and could still continue to outperform in 2021 as well, suggest experts.

After 2 years of underperformance - small & midcaps came back in limelight this year. Not just Indian investors but foreign investors (FIIs) are also looking to capture big gains in small sizes.

Conviction of analysts is growing strong with respect to the small & midcaps which could attract some more attention in the next 12 months. One big reason for the outperformance is the valuations and with the economy bouncing back, broader market could deliver big gains.

The ideal portfolio strategy would be to allocate money in quality small & midcap space which could rise as the economy rises. “The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline. We believe volatility will decline significantly in 2021 which will lead to a small and mid-cap rally,” Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities told Moneycontrol.

“From a valuation perspective, the mid-caps look attractive vs. large caps. Our case for two year rolling returns indicates that the market has turned in favour of small and mid-cap stocks which are more reasonably valued and offer greater upside potential,” he said.

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Another big factors which is fuelling the optimism in the small & midcap space is the September quarter earnings. India Inc. did manage to surprise the analysts’ community and strong management commentary suggests that worst is behind us.

The September 30, 2020 quarter results beat consensus forecasts for most small & midcap (SMID) stocks, according to analyst commentary. Edelweiss Securities in a report highlighted that the Street was very cautious by Q1-end and then the recovery turning out to be sharper than expected.

“Importantly, Q2 earnings and accompanying management commentary has led to strong upgrades in FY22 estimates. Consensus continues to play catch-up in this recovery,” added the report.

Gautam Duggad, Head of Research – Motilal Oswal Institutional Equities told Moneycontrol that it will be a function of earnings delivery. If economic recovery gets broad-based and spread into multiple sectors, then the probability of mid-cap/small-cap outperforming large-caps goes up.

“This is what we saw in multiple cycles in the past and it shouldn’t be any different this time either,” he said.

We have collated a list of stocks from various brokerage firms which are top buys post Q2 results:

Prabhudas Lilladher 25 Nov

Midcaps 25 Nov

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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