Midcap stocks never fail to surprise you. They give exponential returns when you least expect them to even perform. But, that’s how bull markets are structured. The rally in midcap stocks is far from over, but investors should try and stick to quality.
As much as 85 stocks are trading above their 5-year average price and out of that 15 stocks more than doubled from their average price recorded in the last five years, according to data compiled by Moneycontrol.com team.
Most of the stocks which have doubled from their average price of last five years include quality franchises like Bajaj Finserv, HPCL, MRF, Ajanta Pharma, Havells India, Berger Paints, TVS Motor, Biocon, UPL, Rajesh Exports, Biocon, Petronet LNG etc. among others.
If we closely analyse the data, stock which falls under the above category are from various sectors and the rally could be seen as broad-based which is a good sign and include top companies from their respective sectors.
The rally which looks more like euphoria on the Street because earnings might not have played a catch-up could extend further. Hence, investors should think twice before taking profits off the table, suggest experts.
“In solid bull markets, more and more stocks will move above their historical valuation benchmarks. The nature of the bull market is to drive stocks towards excesses. Investors should not sell hurriedly just because the prices have moved above the historical benchmark average valuations, they still can go much higher,” Jimeet Modi, CEO, SAMCO Securities told Moneycontrol.com.
“The best of returns stocks have given are when they were valued way above the benchmarks. For example -- stocks like Microsoft IBM etc. had given their best returns when they were valued at 60 P/E and above. If anybody would have sold the stock considering high valuations, they would have missed the fasted opportunity to make big money,” he said.
In a robust bull market, what works is growth investing and valuation multiple expansions. Investors should hunt for stocks which can deliver growth on a consistent basis. The valuation looks stretched for most of the midcap names but the rally has more legs.
On a trailing basis, currently the BSE midcap index is trading at 35x PE and Sensex is trading at 21x PE, which is higher compared to the historical average.
“We expect that the mid-cap stocks would outperform the index. Investors should invest only in quality midcap stocks, which have high growth potential,” Amarjeet Maurya, Senior Equity Research Analyst, Angel Broking told Moneycontrol.com.
“Most of the companies have been enjoying strong financial track record with substantial brands. They have a leadership position in their business segments and has high ROE,” he said.
Investors should understand that quality may not always come cheap. Hence, dips are best used to get into quality stocks. Companies that are growing their top and bottom lines rapidly above industry average shall command huge valuation multiples, they offer rapid capital appreciation. However, if the growth slows down, the market is equally ruthless to butcher the stock, suggest experts.
“Most of the stocks in the top 15 list they are still good for holding in the portfolios for aggressive investors. Stocks like Bajaj Finserve, TVS Motors, Biocon, Ajanta Pharma, Rajesh Exports etc. fall under growth investing category, their growth is likely to continue further and therefore the stocks to glide still higher,” said Modi.
“At the same time stocks like HPCL, MRF, Tata Communication etc fall under valuation multiple expansion stories, the same is happening because of consistency and strong visibility in their earnings,” he said.