After that bit of an aberration on Tuesday, it seems pretty great going for the market. We are above the 20,200 mark and not a bout of profit-taking besides Tuesday even within the broader end of the market. The largecaps may have led the rally this week but we are not seeing any serious damage within the broader end of the market. How should one approach the mid and smallcap holdings in one’s portfolio now?
On one side, we have the compelling reasons for some of the largecap companies to buy into the portfolio because of the languishing valuations that they are putting currently and the kind of opportunity that they are providing at this point of time. They are probably becoming a better choice than some of the mid and the smallcaps. So, preference is definitely going towards largecaps.
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Even though they generate a relatively smaller percentage of return, they still remain better off largely because of the margin of safety that they provide at the current levels. On the other side, the mid and smallcap companies are purely driven by the liquidity infused rally into the system. A new class of traders have entered into the market in the last few quarters and they are the HNI traders, who typically buy the stocks based on the available liquidity in the market and accordingly the stock prices go up because of the lack of depth of the stocks in the marketplace.
So, to a greater extent the midcap and smallcap companies rally is driven largely because of the higher amount of money getting into these stocks on a comparatively smaller base of equity, that is the first point.
The second point is that the systematically a group of people would probably participate into this activity, as a result of which the rally becomes more prolonged and that is the reason why you are seeing a relatively higher valuation, disproportionate rally into the stock prices and at the same time carrying slightly higher risk compared to what their potential underlying business potential is because of the stretched valuation that they have.
One will have to be very selective in this kind of a market in the midcaps and smallcaps. The underlying story remains intact as far as the growth potential is concerned. But if you discount the stock price two years in advance, then possibly in between, you are going to have the jerks or maybe the margin of safety is not around and so you may have a sharp fall in those stocks. So that is a word of caution coming out for the investors as well.
Talk to us about a few stock ideas, the areas where you are still being selective and finding value?
Well, opportunities are there in the areas of railway stocks, but more importantly, some of the companies which are participating in the larger group programme, say for example, the companies which are helping rollout for the 5G network. Within that, some of the companies with the EMS facilities, where they have got a relatively better amount of outlook to talk about; companies which are into the components and the supply for the fibre optics and the networking, also have relatively better opportunities to talk about.
We also like some of the midcap companies in hospitality business, event management business, where the growth programme is relatively more conducive and also some of the automobile ancillary component companies which are relatively looking more stable given the kind of transition which is happening into EV, as well as in the IC engine, the growth programme that we are seeing particularly in the commercial vehicle space.
So, in respective areas where some of the midcap companies are getting corrected to some of the larger companies, we find opportunities. Unfortunately, I cannot spell out those names
