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Last Updated : May 17, 2019 11:26 AM IST | Source: Moneycontrol.com

Midcaps or smallcaps post May 23? Over 400 stocks fell 10-80% in 2019

For long term investors, any dip should be used to buy into quality mid & smallcaps. Anecdotal evidence suggests that the equity market has given over 10 percent CAGR returns over the 10-year time horizon.

Kshitij Anand @kshanand

Midcaps or smallcaps? This is the age-old question investors face when it comes to investing.

The wounds are still fresh after the last year carnage as more than 400 stocks of the BSE Smallcap and over 50 of the BSE Midcap plunged up to 80 percent.

The big event week is here and wild gyrations are possible on the event day i.e. May 23. But, does it make sense to put your hard-earned money into small & midcaps where the corrections is still far from over.

Going by analyst commentary, select mid & smallcaps which have corrected because of liquidity outflows and not because of structural concerns could well bounce back handsomely after May 23 and the valuation premium with respect to largecaps has also narrowed which is a comforting factor.

As many as 465 stocks in the S&P BSE Smallcap index fell by 10-80 percent which include names like Jai Corp, Eris Lifesciences, Usha Martin, BEML, BGR Energy, Corporation Bank, Thermax, Escorts, TVS Electronics, Delta Corp, Arvind, Zee Media, Jet Airways, HEG, Reliance Communications etc. among others.

In the S&P BSE Midcap index, as many as 53 stocks plunged 10-80 percent so far in 2019 which include names like MRF, Natco Pharma, Adani Power, Adani Enterprises, IDBI Bank, Dewan Housing, Reliance Infra, and Reliance Power.

Generally, election month sees wild swing with indices moving in a range of about 30 percent (May 2004 and May 2009). In case, BJP gets more than 272 seats, HDFC Securities expect the market to rise sharply as investors are not expecting BJP alone to get a majority. Even beaten down mid and small-cap stocks can do well.

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For long term investors, any dip should be used to buy into quality mid & smallcaps. Anecdotal evidence suggests that the equity market has given over 10 percent CAGR returns over the 10-year time horizon.

“For a long-term investor, it is also important to evaluate returns as per the investment horizon rather than being swayed with short-term events or time horizon, Sensex CAGR of approximately 13 percent over 10-year time horizon proves that equity as an asset class has the potential to deliver the best performance over the long-term,” Devang Kakkad, Head Research Equirus Wealth Management told Moneycontrol.

“In view of the recent correction from historic highs, valuations are not cheap but reasonable. BSE Sensex is now trading at forward P/E of 17.6 vis-à-vis 5-year average of 16.7 and BSE Midcap is now trading at forward P/E of 17.5 vis-à-vis 5-year average of 19.0,” he said.

The S&P BSE Midcap, and the Smallcap index are still down more than 20 percent from its recent 52-week high of 17,645 while the S&P BSE Midcap index has plunged by about 17 percent from its 52-week high of 17,017.

Rajiv Singh, CEO Stock Broking at Karvy told Moneycontrol that the mid and smallcap stocks tend to outperform when two conditions are met, firstly markets should be in a risk on mode, which should be the case after 23rd May.

Secondly, valuations should be favourable. In 2018, mid and small caps were at a significant premium to large caps, leading to their underperformance. “Currently they are at a small discount. Thus the conditions for them to outperform large caps are falling in place and we would invest in midcaps,” said Singh.

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

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First Published on May 17, 2019 10:11 am
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