Should you buy mid-cap and small-cap stocks?

One needs to be cautious despite the uptick seen on Monday as the real test of the rally in this segment will be the upcoming result season, analysts say

Stocks from the mid-cap and small-cap segments saw fresh investor interest on Monday. While the rise in the S&P BSE Mid-cap index was in-line with the up move in the S&P BSE Sensex, the S&P BSE Small-cap index outperformed by rising 3.4% as against 1.9% rally in the S&P BSE Sensex.

On the National Stock Exchange, the CNX Mid-cap index and the CNX Small-cap indices rose 1.5% and 3.1% respectively, as compared to 1.8% up move in the CNX Nifty.

Among individual stocks, Sharda Cropchem, PTC India Financial Services, NCC, Sterlite Technologies, Mahindra CIE Automotive, KRBL, Kalpataru Power Transmission and Asahi India Glass gained between 6.8% – 13.7% in the S&P BSE Mid-cap index.

In the small-cap segment on the BSE, Panacea Biotech, Gravita India, Zodiac Clothing, 8K Miles Software, Liberty Shoes, Phillips Carbon Black and Magma Fincorp were among the top gainers that moved up 14% – 20%.

Investing strategy

So, should you invest in these stocks and how long will the uptrend last?

Analysts say that one needs to keep in mind that a lot of these mid-cap and small-cap stocks have corrected quite sharply over the past few weeks and hence could have seen value buying. However, one needs to be cautious given the upcoming results season, they advise.

K Subramanyam, assistant vice–president (institutional research), Asit C. Mehta Securities, says: “We are not too far away from the results season and investors could be buying based on expectations. Moreover, a lot of these stocks had corrected substantially in the last two – three months. So investors could be bottom fishing at these levels in some of these counters. We have Gujarat Pipavav, Gujarat Gas and Gateway Distriparks (GDL) are currently on our radar. I don’t think one needs should buy defence – related stocks at the current levels given the run up seen since the last few months. However, one can buy Bharat Electronics (BEL) on a correction.”

Ravi Shenoy, assistant vice president (mid-cap research), Motilal Oswal Securities believes that the outperformance in the mid-and small caps will last a few more days.

“Typically around the financial year-end, the Nifty tends to remain range-bound as individual stocks get pick up by fund houses, more from NAV (net asset value) propping up measure. Fund houses top up their current holding by picking up stocks from the mid-cap and the small-cap segments,” he says.

“However, the real test of the mid-cap and small-cap stocks will be the result season. Given the rally since the last one year, the valuations in some of the stocks were looking stretched. The recent fall in the markets have to an extent corrected the valutations in certain pockets. So where the correction hasn’t happened and if the results disappoint, we’ll see a sell-off,” he adds.

Suprajit Engineering, Mayur Uniquoters, Marico Kaya are a few stocks he likes. Among the slightly larger names, he prefers Arvind Ltd and Bajaj Finance.

	52-week high	27-Mar-15	30-Mar-15	% chg *
S&P BSE Sensex	30024.74	27458.64	27975.86	1.88
CNX Nifty	9119.20	8341.40	8492.30	1.81
S&P BSE Mid-cap	11180.70	10359.93	10559.52	1.93
S&P BSE Small-cap	11606.12	10440.69	10795.40	3.40
CNX Midcap	13521.65	12746.05	12939.10	1.51
CNX Smallcap	5906.45	5414.75	5584.00	3.13
* Change over last closing
Data compiled by BS Research