Will small, midcap stocks rally continue? What experts say; check top bets

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Updated: Mar 07, 2019 5:55 PM

Even as we witness a comeback in the small and midcap stocks in the recent times, stock market experts say that many of the scrips in the space are still trading at attractive valuations. We bring to you top bets.

According to Gautam Duggad of Motilal Oswal, historical peak-to-bottom correction trends suggest that mid-cap correction is overdone.

Even as we witness a comeback in the small and midcap stocks in the recent times, stock market experts say that many of the scrips in the space are still trading at attractive valuations. “A rally in small and mid caps started a few days back. Many stocks have rallied 15-20% from the bottom. However, if we look at it from the context of the levels from which they fell and where the overall large cap valuations stand today there is still a long way to go before we can say that the rally is over,” investment adviser Sandip Sabharwal told Financial Express Online. Interestingly, the Nifty Smallcap 100 Index has gained more than 8% in the last one week alone. The Nifty Midcap Index has rallied by more than 5% in the period.

According to Sandip Sabharwal, many high quality small and mid caps are trading at single digit valuations despite having good growth prospects. “We should see them coming to reasonable valuations and then overvaluation over the next few months,” he added.

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Milan Vaishnav, Consulting technical analyst at Gemstone Equity Research & Advisory Services said that the recent rally was derived from the broader CNX500 Index which pulled back from the 8,720 to the present levels of 9,220. Milan Vaishnav explained that CNX500 contributes to the improvement in the market breadth as well. This index is represented by 500 stocks which represent over 95% of the free float market cap of all listed securities, he said to Financial Express Online. “The movement in the mid and small caps will be directly related to the performance of this index going ahead,” he said.

According to Gautam Duggad of Motilal Oswal, historical peak-to-bottom correction trends suggest that mid-cap correction is overdone. “The average difference in peak-to-bottom correction between the Midcap 100 and the Nifty in the past has been around 10-15%. In the current episode, this difference stands at 23%, almost 2x of the average differential,” Gautam Duggad, Research Analyst at Motilal Oswal, said.

Sharing its top bets from the midcap space, Motilal Oswal noted that M&M Financial, Page Industries, Sun TV, LIC Housing Finance have corrected by as much as 40% from their 52-week highs, and thus are available at attractive valuations. “Our analysis of fundamentals and valuations for mid-caps and comparison of mid-caps versus large-caps on several frontiers suggest that the relative attractiveness of mid-caps has gone up,” the firm noted, adding that we the broad underperformance of the mid-caps is overdone and interesting bottom-up opportunities are now available in this space across sectors.

(Please consult your financial advisor before making any investment related decision.)

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