With the Sensex showing some signs of recovering from its previous highs, the focus is turning towards the midcap space. The performance of the midcaps is seen as a key to pushing and sustaining the rally that one has seen in the market in the last couple of days.
And if the performance of the midcap stocks in the last weeks is anything to go by, it seems to be party-time. Today, the Midcap Index closed up 1.40%.
Remember, these stocks were savagely beaten in the May correction. But since July 26, 2006, the BSE Midcap Index has gone up by 7.56%.
If one looks across this space, stocks like Adani Exports, Petronet LNG, Cybertech, Crompton Greaves, Jaiprakash Associates have appreciated from 5% to 8%.
Jayesh Gandhi of Birla Mutual Fund describes this change of sentiments about midcaps. "Action is now better in midcaps. Trading volumes have also increased. The risk appetite is also better now. With the fear of higher interest rate slowly receding, investors' sentiments are turning positive."
What has changed?
So what is responsible for this change? Analysts put it good earnings numbers and reasonable valuation in that space. "Generally the midcaps have reported good results, and what happened in May-June was that the bottom just fell off for many of them. 40-50% fall took place in good midcaps. That was not warranted on fundamentals. That was more of brokerages and banks liquidating clients' positions. So now when the PEs have become reasonable, we are talking about good companies," says investment advisor PN Vijay.
The performance of the midcap space is also barometer for judging the retail investors mood about the market, as the bulk of the retail investment goes to these stocks. So if these stocks have again started rearing their heads, it means the return of the retail interest in the market, which is good for its breadth.
"The attention of the market will now move to midcaps, traders in the retail market will start looking at opportunities over there. That is where the real move is going to be now. Largecaps will take a respite; 50 points here or there, but the real money will now be made in midcaps, says Amit Dalal of Amit Nalin Securities.
Will it last?
But will this performance last for some period of time or will it turn out to be once in a while kind of affair? "Yes it should last," says Deven Choksey of KR Choksey Securities. Choksey says that the correction that took place last time in this space was beyond the fundamentals.
"It was just negative sentiment that caused huge sell-off in this space. Fundamentals were never in question. Hence, today when the sentiments have improved, the fundamentals of the quality midcaps are asking for better values."
Deepak Jasani of HDFC Securities second this thought. "Midcaps are playing a catch up. Technicals suggest that they are trying to partially bridge the valuation with the frontliners and will outperform them for the next few weeks," he says.
Investment advisor SP Tulsian also believes that unless there are some extreme external or domestic factors, the midcaps will continue to shine. "They are gradually going up and you can't ignore them," he says.
What are the value picks?
Given this scenario, which are the stocks one should look at in this space? Choksey recommends:
Choksey says that these are all good companies and are showing good growth.
Further, their valuations are also very comfortable. "When you look at these companies, they are having 30% plus growth and are available at 10 to 12 PE," he says.
Deepak Jasani of HDFC securities thinks that as of now, the focus should be on large midcaps, as small midcaps still have time to perform. He doesn't have any stock specific picks because he thinks that the scene is still not clear in this space. However, he picks out cement, commodity, capital goods, construction and technology stocks, which one can look at.
Investment advisor SP Tulsian says that since the list of midcap stocks is so long, people need to select stocks according to their own liking. However, he recommends all sugar stocks:
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