When it comes to investing, everyone is looking for the next multi-bagger. Practically, it is very difficult to identify and one needs patience, too, to hold such a stock. Currently, the market is near an all-time high and usually at lifetime highs, there is too much froth in mid-cap and small-cap, i.e., mid-cap and small-cap stocks trade at very high valuations as investors are chasing those stocks. But there are times when investors need to protect their investment.
Usually, returns on mid-cap or small-cap are more than large-cap since large-cap stocks are well-established firms. Mid-cap firms have tremendous scope for growth and can give higher returns in the 3-5 years investment horizon.
Lack of information on mid-cap stocks
One of the factors that makes it difficult to judge the stock is lack of information on mid-cap stocks. Many mid-cap/small-cap stocks do not have publicly available information and that is why if we look at research reports from various agencies, broking house, ratings, etc., they recommend large-cap stocks. That is why we do not see any conservative investors investing heavily in mid-cap stocks.
Another reason why large-cap stocks should not be ignored is because of diversification. If we look at institutional holdings, these are diversified with not just mid-cap but also large-cap stocks. One of the benefits is that when the market is in the growth stage, we would see mid-cap stocks performing better than large-cap stocks. However, when the market is in a correction mode, the same high-value mid-cap stocks would see its capital eroding faster than large-cap stocks (a phenomenon we saw at the start of this year). Remember the saying that in a bull market, rising tide lifts all boats but it can also cause a big loss when bulls give way to bears.
Mispricing in large-cap stocks
Mispricing in large-cap stocks are usually because these companies run into temporary problems and investors sell or shun the stocks as outlook or financials for next quarter or next year is poor. There is very little information that is not widely known in large-cap stocks as investors and analysts follow widely large-cap companies. Another reason would be because general market environment is pessimistic where often companies with no problem at all see their stock prices getting beaten because of macro economic worries or a sombre market mood.
So, investors should be looking at large-cap stocks also instead of looking at just mid-cap and small-cap stocks. Sometimes, instead of thinking out of the box, it is advisable to look into the box and stick to the basics. Stocks of good, solid and established companies may be available at throwaway prices which investors are ignoring in anticipation of a huge move from mid-caps. Apart from focusing on upside, it is prudent to protect the downside when investing.
The writer is director & COO, Tradebulls Securities