Small Cap and Midcap Stocks are Down 20-50% From Recent Highs. Factors to Watch!
One out of five stocks in the BSE500 index fell more than 20 percent each from their recent peak, data from AceEquity shows.
The S&P BSE Midcap index fell a little over 5 per cent from the all-time high of 21,085 (4 March), and SmallCap index fell by about 4 per cent from the all-time high of 21,667 (9 April), compared to over 8 per cent in Sensex from the recent peak of 52,516 (Feb 16). In theory, a 20 percent fall from the recent peak suggests bear momentum.
There are as many as 116 stocks in the S&P BSE 500 index including IRCTC, LIC Housing, HEG, Apollo Hospitals, CEAT, Canara Bank, Shipping Corporation, Delta Corp, DLF, and Bliss GVS, etc.
“The small and midcap space had been highly challenging for stock pickers during 2017-20. But the management of many of these companies have fine-tuned their strategies over the last couple of years to face the new business reality and challenges, and, going forward, earnings and quality of many of these companies will start exhibiting sharp improvements,” Shailendra Kumar, Director & CIO, Narnolia Financial Advisors Limited.
“Some of the current mid and small cap companies would be becoming large companies in the current expansion phase of the economy and the market, and those are must-have stocks that will help investors create huge wealth,” he said.
“Midcap, as a basket, is still left with a lot of steam. Thus, buying on dips can be a strategy. A stock that has fallen by 10-30 per cent can be taken into consideration. The last couple of months shall be earmarked with a lot of volatile swings and phases of whipsaw trades,” Sandeep Porwal, Technical & Derivative Analyst, Ashika Group.
“Despite that, if any stock in the midcap space manages to retrace the highs marginally, it should still be rewarding,” he said.
All the stocks which brokerages have recommended in their strategy reports have fallen 5-20 percent from their record highs in the recent past.
Motilal Oswal recommends some top buy midcap ideas that include Cholamandalam Financial Holdings, SAIL, Emami, L&T Technology Services, Varun Beverages, Gujarat Gas, Orient Electric, and Federal Bank.
Prabhudas Lilladher also recommends few mid & smallcap stocks that include Polycab India, Emami, Zee Entertainment, Endurance Technologies. From the smallcap space, the brokerage firm likes Westlife Development and Inox Leisure.
Factors to watch:
- Investors should also do their own research before making a buy or a sell decision.
- Technical analysis offers a lot of tools and studies to empower one to take a buy or a sell decision. A few of the approaches include the top-down approach, where a holistic view of the index, sectors and underlying stocks will help a trader and investor to make sustainable returns.
- “Investors can also use screeners such as relative strength comparison, moving average crossover, retracement-based strategies, and reversion to ascertain trend reversal and trend continuation,” says Porwal of Ashika Group.
- “For making a rationalised buy or sell decision, one should include the following parameters: is it near key Fibonacci ratios such as 50 & 61.80%, after a strong rally?
- “Valuations, along with the quality of management, healthy performance track record and proven business models are among the top fundamental parameters in screening stocks for the long term,” Gaurav Garg, Head of Research, CapitalVia Global Research Limited.
- “Double-digit correction in stocks with strong fundamentals might be a good way to pick stocks, if one has full confidence in the fundamentals of the company. However, the same cannot be said for the mid-cap and the small-cap space and one should be more careful there,” he said.