Over 100 small and midcap stocks down 20-50% from recent highs. What you should do, per analysts

The broader market space has been relatively more resilient, especially during the fall seen in the past few days, largely on account of the rise in COVID cases that resulted in partial lockdowns in various states.

A lower interest rate environment and higher fiscal spending will continue to support companies in the broader market space, and once COVID cases stabilises and lockdowns will be lifted – small and midcaps will bounce back.

“The small and midcap space had been highly challenging for stock pickers during 2017-20. But the management of many of these companies have fine-tuned their strategies over the last couple of years to face the new business reality and challenges, and, going forward, earnings and quality of many of these companies will start exhibiting sharp improvements,” Shailendra Kumar, Director & CIO, Narnolia Financial Advisors Limited, Moneycontrol.

“Some of the current mid and small cap companies would be becoming large companies in the current expansion phase of the economy and the market, and those are must-have stocks that will help investors create huge wealth,” he said.

Data suggest that the Midcap 100 and Smallcap 100 indices outperformed the Nifty in nine out of 12 months. Many stocks have rallied over 100 per cent in the last 12 months or FY21 – so a marginal dip should not be considered a bearish sign.

“Midcap, as a basket, is still left with a lot of steam. Thus, buying on dips can be a strategy. A stock that has fallen by 10-30 per cent can be taken into consideration. The last couple of months shall be earmarked with a lot of volatile swings and phases of whipsaw trades,” Sandeep Porwal, Technical & Derivative Analyst, Ashika Group, told Moneycontrol.

“Despite that, if any stock in the midcap space manages to retrace the highs marginally, it should still be rewarding,” he said.

What to Buy?

All the stocks which brokerages have recommended in their strategy reports have fallen 5-20 per cent from their record highs in the recent past and are part of the BSE500 index.

Motilal Oswal recommends some top buy midcap ideas that include Cholamandalam Financial Holdings, SAIL, Emami, L&T Technology Services, Varun Beverages, Gujarat Gas, Orient Electric, and Federal Bank.

Prabhudas Lilladher also recommends few mid & smallcap stocks that include Polycab India, Emami, Zee Entertainment, Endurance Technologies. From the smallcap space, the brokerage firm likes Westlife Development and Inox Leisure.

Factors to watch:

A quick look at the stocks recommended by analysts is a good way of short-listing but investors should also do their own research before making a buy or a sell decision.

Technical analysis offers a lot of tools and studies to empower one to take a buy or a sell decision. A few of the approaches include the top-down approach, where a holistic view of the index, sectors and underlying stocks will help a trader and investor to make sustainable returns.

“Investors can also use screeners such as relative strength comparison, moving average crossover, retracement-based strategies, and reversion to mean to ascertain trend reversal and trend continuation,” says Porwal of Ashika Group.

“For making a rationalised buy or sell decision, one should include the following parameters: is it near key Fibonacci ratios such as 50 & 61.80%, after a strong rally?
Reversion to mean like consolidation is seen near the key 20, 50 & 200 Exponential Moving Averages & Simple Moving Averages,” he said.

Investors should also give a quick glance to the fundamental aspect as well.

“Valuations, along with the quality of management, healthy performance track record and proven business models are among the top fundamental parameters in screening stocks for the long term,” Gaurav Garg, Head of Research, CapitalVia Global Research Limited, told Moneycontrol.

“Double-digit correction in stocks with strong fundamentals might be a good way to pick stocks, if one has full confidence on the fundamentals of the company. However, the same cannot be said for the mid-cap and the small-cap space and one should be more careful there,” he said.

Disclaimer: The views and investment tips 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 decision.