Spotlight turns to mid-caps

Thu, Apr 10 12:30 AM

As we enter earnings season, the market is beginning to focus on individual stocks. This is a good sign.

Till now, traders and investors were so overwhelmed with overall market risk that there was little mindspace for spotting individual stock price aberrations. Now, with the Nifty being so utterly rangebound, there is no recourse but to hunt for stock ideas to generate returns.

It's no coincidence then that midcaps and small caps have outperformed the Nifty over the last ten days. This trend may well continue, if the Nifty remains within it's narrow trading range.

Earnings, of course, will determine which clusters can outperform. The start hasn't been too bad.

Yes bank's numbers bore none of the feared scars of derivative losses. If the larger private sector banks can demonstrate the same, the pall of gloom on this sector could lift somewhat.

Mastek's numbers too were well ahead of expectations. While it's too small a stock to be a leading indicator of what the IT biggies will report and guide, it certainly highlights the cheap valuations most midcap tech stocks are trading at.

Mastek is available at less than 7 times next year's earnings and the average PE for midcap IT ranges between 6 and 10. Cheap.

No wonder they all rallied yesterday. What's good about the midcap upmove of the last few days is that the cats and dogs are not participating, at least yet.

Some cheap PSU banks, some good midcap pharma names, some midcap IT, a few commodities like sugar are leading; the momentum brigade of RNRL, Ispat, IFCI, J P Hydro etc are still lying low. That raises hopes that this mid-cap upmove isn't an empty, low grade speculative surge, rather a product of investors trying to buy into businesses trading at below fair value.

We need more of it. Lets hope the midcap earnings season passes without too many accidents.

On current earnings estimates there is value littered all over this space, the market just needs to be convinced that those estimates are not a mirage.

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