Is It Time For A Rally In MidCap Stocks?

The midcap and small cap index have been laggards for a very long time. For the last few days, we are seeing some attempts at a comeback from these stocks.

Take a look at the returns from them (data: Feb 28, 2019)

What is most interesting is that valuations of the Midcap Nifty 100 is now at a discount to the Nifty. There is a strong belief that because of this discount, money will now start flowing into midcap stocks, as some of the quality large cap stocks are already trading at a heavy premium.

The fall in midcap stocks has been so brutal, that there is a high possibility of a sharp upward movement.

In fact, many analysts are now suggesting to look at good quality names from the space, as large part of the selling had had to do with relocation of funds by mutual funds. Also, the worries of the election outcome has seen midcap stocks face a severe downside, as compared to some of the large cap stocks.

According to reports it is for the first time in nearly four years that mid cap stocks are now readily available below their historical average P/E ratios of 18 times. This itself makes a strong case for accumulating midcaps.

What to buy?

There are many high-quality names that you could look at. For example, you could look at some beaten down names in the infrastructure space like J.Kumar Infra and also Graphite India, which makes graphite electrodes. Both of these of course are not really midcap, but, smallcap stocks. Some of these stocks have seen some recovery, but, the price destruction in some cases has been more than 50 to 80 per cent from their 52-week highs.

We advocate buying into companies that have a strong management and also that have a proven track record. The government owned NBCC shares also look good from a long term perspective, given the way its order book has grown over the decade. The shares are down almost 40 per cent from a one year high of Rs 92, which makes a compelling case to buy.

The warning

It's to be remembered that these stocks can always be risky, so you need to be very careful, before buying into these stocks. However, the downward risk to some of the stock could be low, given that you are getting them at very cheap valuations.