Book profits in mid-& small-cap stocks
Analysts say many are in the bubble zone and could correct sharply
Investment advisor G Chokkalingam is finding it difficult these days to come up with fresh ideas for his clients on putting in money in the mid- and small-cap space. He thinks that the mid- and small-cap stocks are in bubble territory as the valuations don’t justify the price.
“Historically, there have been certain sectors or themes that traded at stretched valuations and they would lift the entire mid- and smallcap indices. This is the first time I see overvaluations across the board,” says Chokkalingam.
He now recommends clients hold 50 per cent in large-cap firms, 30 per cent in smaller companies and the remaining in cash in their portfolio. Until last year, he advised clients to have an 80 per cent exposure to midand small-cap stocks.
Investment managers suggest that investors should book profits in mid- and small-cap stocks where they feel valuations are stretched. “Those who want to sit on cash and wait for an opportunity should start selling slowly. But if they have an alternative idea to invest in, they can move out of expensive stocks entirely,” suggest Prateek Agrawal, business head and chief investment officer, ASK Investment Managers.
Some suggest that investors should look at large-caps now. If markets start correcting, stocks of smaller companies will fall much faster. The downside will be lower if they are in large-cap stocks.
“Investors need to be very selective if they wish to continue to invest in smaller companies,” says Yogesh Nagaonkar, fund manager, Bonanza Portfolio Management Services. He suggests that the investor should look at individual companies, their competitive advantage, and then the sector, rather than the other way round. He says there are attractively valued companies in plastics, forging and construction.
For mutual-fund investors, the core of the portfolio always needs to be diversified funds. The exposure to mid- and small-cap funds should be restricted to 30-40 per cent of the equity portfolio. They should continue their systematic investment plans without worrying about the market valuations, and fund managers will take suitable calls on their behalf.
Recently, Kotak Institutional Equities came up with a report, which said: “We find valuations of several mid-cap stocks in our coverage universe very high. In fact, it would not be wrong to say that some are in the bubble phase with the market extrapolating strong growth and high returns in perpetuity.” The brokerage feels that some companies do have certain strengths but their valuations are absurdly high, especially those in the semi-branded (semi-commodity) space. The report gives a list of 19 such stocks including Amara Raja Batteries, Dalmia Bharat, Shree Cement, Crompton Greaves Consumer, Greenply Industries, Voltas and Whirlpool.
Investment managers feel that there is a bubble in mid- and smallcaps because to justify the current prices, these companies will need to grow their earnings multiple times in the next two years. But with economic growth, industrial production and credit growth stagnant, it doesn’t seem possible. In fact, DSP Blackrock stopped taking fresh inflows in one of its best-performing funds, DSP Blackrock Microcap Fund, after the sharp run-up in mid and small-cap shares.
Experts say that smaller companies continue to lure investors as many believe that stock markets are poised for a bull run. After the BJP’s victory in Uttar Pradesh, there are expectations that the party will be re-elected in the next general elections. The possibility of a stable government for the next seven years is giving hopes to many investors.