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Top 5 Expensive Mid-cap Stocks. Should You Sell?

May 2, 2022

Top 5 Expensive Mid-cap Stocks. Should You Sell?

A friend was discussing his investments in the mid-cap space.

Apart from being overjoyed by his portfolio's stellar performance, he was wondering when to cash in on them?

'While some have delivered 30-50% returns, others are up 2-3 times. Do you think I should sell them before it's too late?', he asked.

And he's not alone.

Nowadays most investors have this query. Everywhere you go, people discuss the stock markets and exchange tips.

From your paanwala to your next-door neighbour, everyone is ecstatic with the jump in the markets, and rightly so.

The markets have performed exceedingly well in the wake of the pandemic, recovering faster than they did after the financial crisis. The BSE Mid-cap index has doubled since the great crash of 2020, partly thanks to the pandemic stimulus.

But with most stocks clambering to their all-time highs, you are compelled to wonder if- you should sell? When posed with such a dilemma, its best to turn to the legendary investor Mr. Warren Buffett.

'Be fearful when others are greedy. Be greedy when others are fearful.' - Warren Buffett.

And so, with this in mind, we discuss whether you must hold on or sell 5 of the most expensive mid-cap stocks.

#1 Dixon Technology

First on our list is Dixon Technologies.

Dixon is a multinational electronics manufacturing and services company that manufactures consumer electronics such as televisions, washing machines, and smartphones.

It has long-term contracts with some of the most well-recognised brands in the world such as Samsung, Xiaomi, Panasonic, OnePlus, and Philips which gives it an enviable edge.

Despite expanding in a highly capital-intensive industry, the company has refrained from piling on debt on its books. It is now one of the largest and most cost-efficient players in its industry.

The company's stellar performance is reflected in the parabolic movement of its stock price. While the revenue has quadrupled in the past 5 years, the stock has gone up 7 times over the same period.

However, some might argue there is no more steam left.

Trading at a PE of 150x, much higher than its 5-year average of 61.4x and the industry average of 30x, the valuations look a bit too stretched.

Assuming the company will continue to outgrow the industry over a prolonged period seems far-fetched.

So there is a good chance the stock price might not generate strong returns over the long term.

#2 Sheela Foam

Second on the list is Sheela Foam, the owner of the 'Sleepwell' brand of mattresses.

The company enjoys a large installed capacity spread across the country, an enormous advantage in the mattress industry. Considering mattresses are heavy and need to travel large distances, the proximity of your plant to the consumer affects the quality of service.

In a world where consumers prefer shopping online, mattresses are still sold in brick-and-mortar stores. The reason is that the product is exclusive, making the touch and feel aspect central to the entire mattress selling experience.

This raises the barriers to entry in a mattress business, giving established players like Sheela Foam an edge.

However, none of this matters if the stock is expensive.

The company's 5-yr revenue CAGR has been nearly 12%, while the profit has grown by 15%. Along with being a dominant domestic player in the mattress segment, 19% of the company's revenues comes from exports of mattresses.

But despite its rosy performance, the recent run-up in the stock price renders the stock an expensive buy. The stock has shot up by 80% in the past 5 years.

Trading at a PE of 80x, much higher than the industry PE of 49.1, the stock seems overvalued. The kind of expected growth or returns cannot justify the sky-high valuations the stock currently enjoys.

#3 Trent

Third on the list is Trent, India's leading retailing giant.

A Tata group company, its inherent strength is anchored around well-known brands such as Westside, Zudio, Star, and Zara.

With accelerated store addition in the past 10 years, Trent has emerged as one of the fastest-growing companies in the Indian retail sector.

Its industry dominance and well-established brands have propelled its margin profile culminating in healthy cashflows. These massive cash holdings have ensured the aggressive store addition plan continues with ease.

Baring the one-time pandemic effect in FY21, the company's revenue has grown handsomely at a 5-yr CAGR of 19%. The stock price has mirrored that, having risen 6 times in the past 5 years.

In a developing country like India, a growth stock like Trent from the trusted Tata group makes for a secure long-term bet.

The relentless rise in consumer spending over the next few years may put Trent on the fast track to growth, making it an attractive investment.

#4 Godrej Properties

Fourth on the list is Godrej Properties.

The company is one of the largest real-estate developers (by residential sales) in India with a presence across four key markets - Mumbai, Delhi-NCR, Pune, Bengaluru.

It belongs to one of the oldest and most trusted Godrej group of industries. It boasts a land bank of 3,400 acres in one of the most expensive property markets, Mumbai, giving Godrej Properties a leg up.

Despite functioning in a capital-intensive industry, the company's asset-light model has helped it unburden its balance sheet.

With a robust cash pile, the company's net debt to equity ratio has fallen precipitously from 0.64x reported in the corresponding period of the previous year to 0.04x.

In the past, the company's stock price had fallen over a deal with DB Realty. However, the company recently canceled that deal due to innumerable investor concerns, which is a big plus.

But the recent run-up in the stock price combined with continued operating losses, drive the valuation higher, making it an unattractive investment.

#5 Astral PolyTechnik

Last on the list is Astral PolyTechnik, the fourth-largest pipe manufacturer in India.

The company operates at a total installed capacity of 247 k tn and is present across the north, west, and south markets.

In the past 10 years, the company has clocked in a 22% revenue CAGR, much ahead of the industry growth of 8%. The robust revenue growth comes on the back of its extensive capacity additions combined with a robust distribution network.

Moreover, the industry's transition from plastic to chlorinated polyvinyl chloride (CPVC) pipes has also contributed, putting the company in a sweet spot.

This move has turned Astral into the fastest-growing plastic pipe producer in the country, with a 25% (largest) market share in the CPVC segment.

Apart from manufacturing pipes, the company also has an adhesive and sealant segment. It contributes 21% to the top line.

While the company's growth trajectory and high-profit margins remain intact, the stock might not be attractive at the current valuations.

Trading at a PE of 84, twice as much as the industry PE of 44, it seems like the growth is already priced into this all-time peak valuation.

Should you sell expensive stocks?

Irrespective of where they lie on the capitalisation ladder, a stock's performance is backed by the performance of its underlying business.

Expensive stocks with mediocre growth are the first ones to drop when the market falls.

The price and the valuation are important metrics for analysing a stock but are eventually a function of the prospective business and assets.

If you think the growth doesn't justify the current valuation, it's time to say goodbye.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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