Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Mid & smallcaps: Which direction from here? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 6, 2010

    Mid & smallcaps: Which direction from here?

    After seeing a decline in the early part of this year, stocks of midsize and small size companies have outperformed their larger peers in recent times. The BSE Midcap and BSE Small cap indices have moved up by nearly 1% each over the past month and by about 8% and 5% respectively since the beginning of this year. The BSE-Sensex and the BSE-100 indices on the other hand have given negative returns in both these periods. About the movement of these indices over the past year or so, it is very well known. Stocks of small and mid-sized companies have by far outperformed their larger peers.

    We have written quite a few articles about our concerns over valuations and the upsurge in the movement of these indices. If we look at the chart below, it does seem as if it is one of those times.

    Source: CMIE Prowess

    On seeing the returns of the four indices - BSE-Sensex, BSE-100, BSE-Midcap and BSE-Smallcap, we can clearly see that the midcaps have been left behind in the race. Smallcaps on the other hand have outperformed the midcaps by a good margin. In fact, returns from the smallcap stocks are similar to that of the BSE-Sensex. As compared to the BSE-100 Index, they are marginally higher.

    Going by history, more often than not, there has been some shakeup seen when such a situation has occurred i.e. whenever returns from stocks of small sized companies have done better than those of the larger stocks.

    Apart from looking at the absolute returns, one should also consider the index valuations. However, this time around, the valuations do not seem to be in sync with the BSE-Smallcap index's movement. If we see the chart below, there seems to have been a quite a bit of change in the index's valuations since January this year. The index's PE (price to earnings ratio) has fallen from about 19 times to levels of 16 times. In the process, the gap between the valuations of the two indices does appear to have expanded.

    Source: CMIE Prowess

    Midcaps on the other hand seem as if they have some catching up to do. While midcaps have underperformed stocks from the other categories (in absolute terms), the story is different in terms of valuations. As the BSE-Sensex and the BSE-100 indices have given negative returns over the past few months, their valuations have moved down as well. In the process, valuations of the midcaps stocks seem to be quite close to that of its peers.

    Which way the indices move is anyone's guess. But investors would do well to keep in mind that on an overall basis, stocks across categories do seem to be fairly priced. For example, the BSE-Sensex is trading at a PE of about 20 times. The average PE it has traded it at over the past five years is about 19 times. But it is quite obvious that investors are bullish about India Inc.'s financial performance. What else would be the reason for higher valuations?

    Similar is the case for the smaller stock category. For small and midsized stocks to justify high valuations, their financial performance will need to move in tandem. In the result season so far, the financial performance of small and midsized companies has been quite decent. But then again, it would only be better if investors invest in good companies trading at attractive valuations.



    Equitymaster requests your view! Post a comment on "Mid & smallcaps: Which direction from here?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)