The Midcap Stock Party

The stock market has been  in verticle move since the election results were out. Along with the front line stocks the valuations of Midcap stocks have also  shot up. Caution is the watch word for retail investors.   

If you had invested Rs 100 in the BSE Sensex a month ago today it would be Rs 126, the same amount invested in the BSE Midcap index is today worth Rs 143. This rise in mid-cap stocks is on account of higher investors confidence as well as expectations of improving fundamentals in these companies. The election result has acted as an aphrodisiac for the stock markets and infusion of fresh money into mid-cap stocks, which were then trading at depressed valuations, were among the key reasons that led to the rally.

Are current valuations Streched?

Midcap companies had their back to the wall on account of lack of sufficient funds, higher interest rates and demand slowdown. Also, during the economic downturn, analysts were worried that the mid- and small-sized companies would be among the first and the most impacted, leading to erosion in their earnings as compared to their larger peers. However, they now expect the impact on their earnings to be far lesser, given the improving liquidity situation, declining interest rates, lower input prices and stability in demand.

The macro scene has changed with improved liquidity and demand. A market-friendly budget and a normal monsoon will boost the stock market sentiment even more. Keeping these things in mind, the growth next year could be stronger and thus, the valuations which these companies today command could be justified.

The faster rise in the value of mid-cap stocks has also led to a contraction in the valuation discount between the BSE Sensex and BSE Midcap indices. For instance, the Midcap index was quoting at a price-earnings (P/E) of 13.2 on May 31, 2009, reflecting a discount of 26.3 per cent as compared to the then P/E of 17.9 for Sensex. This discount has now shrunk to 17.3 per cent currently, though it is still higher than 5 per cent seen in January 2008.

What you should do?

There is value in the stock market but one has to be selective about picking stocks. Not all mid cap stocks are good value for your money.

In mid-cap space and only those with good financials and sustainable business model will be rewarded.Investors should use this opportunity to exit dud stocks. They will also have to do their homework thoroughly by sticking to fundamentally strong companies besides, opting for an increasingly selective investment strategy. Also, a phased investment approach is likely to prove beneficial.

Here are some interesing stock picks of our experts in the mid cap segment:

Bartronics India

The stock of Bartronics has gained almost 72 per cent in the last one month. Considering the company’s sound business model, attractive valuations, consistent growth rates and higher revenue visibility, analysts believe that the stock at Rs 162 is still not expensive and is trading at a price-to-earnings multiple of just 4.3 times its estimated 2009-10 earnings.

Read more details about Bartronics>>>

CRISIL

Crisil, which is a leading player in the domestic ratings business, will be a key beneficiary of the country’s growing economy and developing financial markets. The gains would accrue on the back of the company’s diversified business model, which comprises products and services like rating, advisory and research. Besides, it has an added advantage in the form of the support of its parent, Standard & Poor’s (S&P), which is the leading global rating agency. Also, unlike many other businesses, the company is less dependent on capital to expand its business and generate high return ratios, which are among key attributes of a good investment.
 
Going ahead, as per the Basel II norms, all borrowers (with banking facilities above Rs 10 crore) need to get a rating by March 2010 in phases. Many