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The Long Awaited Midcap Rally That Is Just Not Happening
Good Returns | 11th Sep, 2019 04:02 PM

The one part of the market that would almost surely rally according to many analysts was the mid and small cap stocks. Since Jan 2018, the midcap index has fallen close to 25 per cent, while the carnage in individual stocks is as high as 50, 60 and 70 per cent.

Most analysts felt that following the general elections the midcap and small cap universe would see stellar returns. In fact, since the elections the benchmark indices have cracked and the small and midcap universe performance has gotten even worse.

In short, the much waited rally that was to happen in the midcap and the small cap space, has jut not happened.

Are midcaps undervalued?

A recent report by a leading brokerage firm placed the PE of the Nifty Midcap 100 at 15 times, as compared to its 10-year average of 20.7. The Nifty forward p/e on the other hand is placed at 18.1 times, which is more or less in with the 10-year average of 18 times. Clearly, midcaps are fairly valued at the moment, but, much better than the largecap universe, provided earnings sustain. Take a look at some stocks from the midcap index that have dived significantly from their 52-week highs.

Current market price52-week high52-week low IDBI Bank 28.65 65.55 23.65 Jindal Steel & Power 103 246 91 L&T Finance Holdings 97 162.5 88 NBCC 37 70.4 28.5 NLC 56.55 85.4 49

The above are just examples and not necessarily, the ones with the highest losses.

Is there light at the end of the tunnel?

Markets are driven by earnings and in fact are slaves to earnings. With a clear economic slowdown, one cannot expect earnings to revive anytime soon. Hopes are now pinned on the festive season, but, one is not sure, if there would be a demand recovery and hence an earnings recovery.

Many high quality midcap and small cap stocks that are known to pay good dividends have fallen through the roof. In fact, in most cases their dividend yields too have got attractive. Some good quality stocks that have fallen through the roof include names like UFO Moviez, Hindustan Zinc, DB Corp, all of which have paid attractive dividends in the last few years.

It's unlikely that we will see too much of carnage in these stocks, give the way they have been hammered down. At these levels buying in small quantities may yield good returns in the years to come. However, investors should not panic and be prepared to hold onto stocks for the long term.

While downside could be limited, the focus should be on good quality stocks, with a good dividend paying track record.

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