In the last few trading sessions, the way market breadth has panned out in the mid-cap segment it is very clear that demand for midcap paper is still very high. If one looks at the reaction of the street to a positive surprise in Q4 results coming from a mid-cap company, it is very clear there is still lots of money which is ready to move into midcap stocks. While good results will bring some moderation in valuations, but on an overall basis, the valuations are still at the higher end. But as the liquidity support continues, there is no point in fighting it. The only thing that needs to be done, that while buy the stocks, be more selective and have a long term perspective. Don t panic if tomorrow due to what the US Fed does or anything happening in the Middle east, there is a correction. That will only happen, if one has done his or her homework before buying the stocks.
March was a month where mid-cap were beaten down badly. April till now has shaped up better. Now this flip flop of performance has led to a situation where there is a high probability of investors getting confused about what they should do at this point of time, should one avoid mid-cap space or increase exposure. While it should always be the principle, in times of lack of clarity, buying quality stocks should be basic principles which should guide one s decision. Especially when one is buying mid-cap stocks. The reason, when valuations are not cheap then small corrections in broader can lead to strong negative reaction in stock prices. Now how does one do it? Look at the underlying business which is best understood by going through its annual report and look at a certain basic ratio in order to figure out how much return that underlying business can generate in best and worst case.
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Sanjiv Bhasin highlights HDFC Bank as a contrarian bet while top midcap picks are UPL, Persistent Systems and Dhanlaxmi Bank. Bhasin advocates buying real estate stocks like DLF and Godrej on dips and Indiabulls Real Estate. He further mentions gold rally, tech stocks, and pharma bets like Sun Pharma, Dr Reddy s, Lupin.
In the last two months of the market, while the midcaps have done well, though the pace at which the outperformance was taking place has slowed down. So, there is a profit booking taking place in different parts and sectors. Part of this profit booking is due to the fact the valuations are high and probability that it would continue. At this point of time one should also focus on reducing risk.In reducing market risks, investors should integrate both quantitative and qualitative criteria to assess stocks, aligning expectations with realistic market performances and avoiding impulsive shifts based on short-term fluctuations. This involves a disciplined approach to examining fundamentals, particularly focusing on crucial financial ratios such as Return on Equity (ROE) and Return on Capital Employed (ROCE). These measures help in evaluating a company s efficiency and profitability, guiding investors away from making hasty decisions which are mostly done in a bullish market.