 "Many mid-caps run ahead of Street expectation")
Holding on to a stock that has gained sharply this year? It might be time to take money off the table.
Nearly 50 stocks in the 82-member BSE Midcap index have outperformed the benchmark S&P BSE Sensex since February. Of these, around 30 are now trading above their 12-month consensus analysts’ price targets. On average these stocks are above their price targets by 14 per cent, indicating they might have run ahead of their fair value.
Interestingly, in end-February, barring only four of these, all others were well below their 12-month consensus price targets. Since then, benchmark indices have gained a little over 20 per cent, while the BSE Midcap index has gained 27 per cent. This happened amid supportive global cues and domestic factors like hopes of a favourable monsoon and signs of a pick-up in corporate earnings and the economy.
At least a dozen stocks in the BSE Midcap index have gained a little more than 50 per cent. Nine are from financial space. The biggest gainer is Indian Bank, whose stock has more than doubled since February 29, followed by Allahabad Bank which rallied 86 per cent. The current prices of both banks are way above the consensus price target, compiled by Bloomberg. Indian Bank has a price target of Rs 132, compared to its Friday’s close of Rs 157. Allahabad Bank’s stock is at Rs 79, while its price target is at Rs 49.
Analysts say the consensus price targets in some cases might not have factored in some of the incremental positives. However, most stocks which are above their fair value might be vulnerable to weak news flow or earnings disappointment, they add.
“Several cyclicals have done well and this earnings season would be a reality check for some of the stocks,” said Sanjeev Zarbade, vice-president at Kotak Securities. “Our advice to investors would be stay invested in strong companies and have a long-term view.”
The BSE Midcap index is trading at a 12-month trailing price to earnings (P/E) multiple of 33 times. Going by consensus, it is expected to gain only two per cent in the next one year. In comparison, the Sensex, focused on large-caps, is expected to gain six per cent in the same time period.
“While the chances of further earnings growth protraction cannot be ruled out, the probability of the start of an earnings upgrade cycle is rising, as key macro indicators are turning favourable. In this context, we expect large-cap stocks to perform better than mid-cap growth stocks. Growth stocks are overvalued, while value stocks are cheaper,” said Naveen Kulkarni, co-head of research at PhillipCapital.
Most stocks which have larger upside potential have underperformed since February. SJVN, MRF and Ashok Leyland are expected to gain over 20 per cent in the next one year.
“Given the sharp rally seen in some of the mid-cap stocks, it is important that investors exercise caution. They should give importance to quality names, as any disappointment at this juncture can cause severe erosion in stock prices,” said
Ajay Bodke, chief of portfolio management services at brokerage Prabhudas Lilladher.
