It's time for mid cap stocks to bounce back

Investment

oi-Sunil

By Sunil Fernandes

Published: Tuesday, October 22, 2013, 8:38 [IST]

The Sensex is just 300 points from hitting new record levels achieved in 2008. The rise to the present levels in the Sensex has largely been on the back of IT, FMCG stocks and select stocks like Tata Motors, all of which have a significant weight in the Nifty.

However, mid cap stocks have not seen any large buying as yet and are still way below their 52-week peaks. Take the case of some smaller blue chip mid cap stocks like Voltas, IDBI Bank, Syndicate Bank, Karnataka Bank, Crompton Greaves etc.

These stocks are nowhere near their 52-week highs, even as the Sensex and the Nifty fast approach their lifetime highs.

Another example is Siemens. The stock is trading at Rs 538, way below its 52-week high of Rs 712. IDBI Bank on the other hand is trading at just Rs 65, almost half of its 52-week high of Rs 118.

Similar is the case with several other mid cap stocks like JSW Steel, Biocon, Bharat Forge etc.

From a valuation point of view some mid cap banking stocks are trading way below book values and at very low price to earnings ratio, even as buying by foreign funds has made the large cap stocks very expensive.

In fact, some of the large cap stocks are quoting at price to earnings multiple of over 30 times, particularly stocks from the FMCG and pharma space.

Against this backdrop, buying into quality mid cap stocks can provide good returns over the medium to long term. In fact, some mid cap stocks are offering dividend yields anywhere between 2-7% with a holding period of just 7-8 months.

Clearly, the valuation gap between the large caps and the mid caps should shrink if the markets continue to remain buoyant.

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