The sudden collapse of mid cap stocks

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The sudden collapse of mid cap stocks
IFCI: Quotes, News
BSE 26.75BSE Quote0.2 (0.75%)
NSE 26.75NSE Quote0.25 (0.93%)
Reliance Communications: Quotes, News
BSE 47.45BSE Quote0.3 (0.63%)
NSE 47.50NSE Quote0.25 (0.53%)
Mid cap stocks over the last few weeks have rallied phenomenally and there is certainly speculative interest in these stocks, going by the low delivery based buying.

This week, however, there was sudden unwinding in these stocks, which left some investors with huge losses.

On Wednesday for example IFCI tumbled 6.5 per cent, Unitech 8.38 per cent, Jain Irrigation 5 per cent, Crompton Greaves 5 per cent, Adani Power 5.77 per cent, Reliance Communication 6.38 per cent, JSW Energy 4.5 per cent and so on. A host of other mid cap stocks slumped.

Analysts have no reason as to why these stocks have fallen, except the argument that they had run up rather sharply and hence the reason for the sudden fall. Some of these stocks are still overvalued, while some of these are not fundamentally the best in the business.

The sharp rally in these stocks is more of a hope rally based on the argument that there would be a Narendra Modi led government at the centre. It's as if there would be instant recovery in the fortunes of the company should a Narendra Modi government be installed at the centre.

Some (not all) of the companies in the sector are already saddled with very high debt and hence it would not be advisable to buy these stocks at the current levels.

Of course, should the markets continue to grind higher, it's highly possible that these stocks would give returns much higher than large cap stocks. However, investing in these stocks could also mean higher losses in case the markets fall.

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