Analysis of choosing the best midcap stocks

Connie D'Souza, like millions of other investors, burnt his fingers in the market mayhem of May with large-cap and mid-cap stocks dwindling to single digits.

Although for a couple of months now, his investments -- especially in large caps -- have recovered as the market is closing in on its earlier highs, D'Souza continues to worry about the mid-cap stocks he has stayed invested in.

Questions like 'will they ever perform again?' and 'if yes, when?' haunting him all the time. And like D'Souza, a large number of retail investors are wondering why mid-cap scrips are not being able to match the performance of large caps in terms of returns.

The fall and rise

While the Sensex is just 1.53 per cent or 193 points away from its all-time high of 12,612 scaled in May, both the BSE Mid-Cap and Small-Cap indices have to cover a good ground, lagging their record highs by 12.5 per cent (753 points) and 18.7 per cent (1,500 points), respectively.

Further, while more than half -- 53 per cent, to be precise -- of Sensex stocks are currently trading at their all-time high levels, the corresponding numbers are just 11 per cent and 5 per cent in case of the Mid-cap and Small-cap indices, respectively.

In fact, with the May havoc, the scenario has turned dramatically dismal for mid-cap and small-cap scrips as they have since then been hit much harder than their large-cap counterparts.

Sectoral performance

Banking, cement, technology and engineering stocks have outperformed the broader market in the current rally, while power, pharma, FMCG and auto scrips have remained laggards to some extent. Metal stocks have turned to be a mixed bag.

Says Ajay Parmar, head of research, Emkay Share and Stock Brokers, "In any market rally, all sectors do not move in tandem, and defensive sectors such as FMCG and pharma tend to lag others."

In the mid-cap category, while banking, cement and real estate stocks have continued to put up a good show, construction, auto ancillaries, IT, pharma, sugar and textile counters have failed to cheer investors.

Time to buy mid caps?

Despite their underperformance in the recent past, there are a good number of experts who back mid caps even now. Jasani believes that at present mid caps have more upside potential than large caps.

Similar is the view of Kedia, who says, "Mid-cap and small-cap stocks are expected to witness some action, particularly after the second quarter results after which they might get re-rated. The mid-cap segment provides a huge opportunity in terms of choice as mid caps outnumber large caps by as many as 10 times."

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