Mid-caps: Is the mania over? - Views on News from Equitymaster

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Mid-caps: Is the mania over?

Oct 20, 2005

The markets have run into rough weather over the past few weeks, eroding investor wealth to a great extent, especially of those who had invested in mid-cap and small-cap stocks, as some of these stocks saw their value erode by as much as 75% to 80%. In some cases, they continue their southward journey till date, as people have not been able to exit because these stocks have been hitting the lower circuit filter everyday (only sellers, no buyers), ever since Securities and Exchange Board of India (SEBI) decided to look into the matter. Penny stocks doubling in a months' time (or maybe even lesser) had become the talk of the town, with every investor - big or small, professional or amateur - ready to take risks beyond his/her appetite and wanting a piece of the pie. In the process, they had clearly overlooked the fact that the only key to success in stockmarket investing is by following 'fundamentals'. We always maintained our view that many of these stocks had run up way too fast and much ahead of their fundamentals and that investing in large cap stocks was safer, although returns would not be as dizzy as their smaller peers.

Shattered investor's dreams...

Company Price on
Sept 1 2005 (Rs)
Price on
Oct 17 2005 (Rs)
%
Change
52-Week
H/L (Rs)
Volume on
September 1 2005
Volume on
Oct 17 2005
%
Change
BSE MIDCAP 4,098 3,990 -2.6% 4,365 / 3,001 - - -
BSE SMLCAP 5,989 5,352 -10.6% 6,394 / 3,722 - - -
IFSL 30.6 7.6 -75.3% 38 / 7.6 30,946,631 421,414 -98.6%
LandMarc Leisure 4.0 1.6 -60.4% 4.7 / 1.6 867,850 181,350 -79.1%
Sarang Chemicals 11.6 6.2 -46.2% 17.5 / 6.2 2,362,338 52,100 -97.8%
ABM Knowledge 21.9 12.1 -45.0% 36 / 12.1 12,747 3,000 -76.5%
Dynacon Systems 1.2 0.7 -35.7% 1.9 / 0.7 282,052 31,151 -89.0%
Prajay Engineers 109.1 70.4 -35.5% 143.5 / 3.3 137,154 9,185 -93.3%

Post the diktat by the capital market regulator, we conducted a poll on our website asking people's view on mid-cap stocks post the regulatory action. The result - 64% of the participants said that their view has changed post the scrutiny, 29% voter's said that their view has not changed, while the rest were neutral.

If one takes the trouble to go back in history, mid-cap stocks have been the first ones to be gunned down in case of any correction. What's more, investors were ready to give these stocks valuations at par with their larger peers and in our view, prices of these stocks had already factored in the future growth, at least of the next two to three years. Mid-cap stocks were trading at considerably high valuations and there was some or the other justification floating in the market to make the valuations look reasonable. Since, most of the news pertaining to such stocks was 'plain gas', it was obvious that investors would back off at the slightest signs of trouble, as most of the investors in these stocks were not genuine.

However, all said and done, it should be understood that opportunities exist everywhere, at every level for large cap stocks and even for select, fundamentally strong mid cap stocks. It calls for some wisdom on the part of the investor to acknowledge the fact that an incessant upswing in the prices of mid-cap stocks, which were devoid of any fundamental backing, is not what they should have got lured by in the first place, especially at times when even the best of the mid-cap 'stories' seemed fully priced. It is time for one to contemplate on the longevity of the rally and mull on the correction rationales.Hence, one must learn from their mistakes and take the current correction as an opportunity to deploy funds, sensibly.


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