While investors in mid- and small-cap stocks have faced disappointing returns in recent times due to regulatory crackdowns, a broader perspective reveals their resilience and potential for big gains. Despite short-term setbacks, these stocks have maintained their status as superior compared to large caps, especially evident when analyzing their one-year returns.
Over the past 12 months, small and mid-cap stocks have delivered impressive returns, around 50 percent, demonstrating their ability to create great value for investors. This trend underlines the attractiveness of these stocks for those willing to accept volatility and seek opportunities for substantial growth in their investment portfolios.
However, just in March, the Nifty Midcap index has lost 3 percent so far while the small-cap index has crashed over 6 percent. In comparison, the benchmark Nifty is up 0.17 percent.
Read here: Bullring ends here! Phillip Capital sees Nifty 50 falling 15% to 18,550
Amid widespread concerns about foam formation in the Indian stock market, the brokerage stands out with a contrarian outlook. While many voices are expressing fear, the brokerage claims that the Nifty 50 and Nifty Largecap 100 are currently fairly valued. In contrast, it sees great potential in the Nifty Smallcap 250 index.
“Even if we tone down consensus earnings and take valuation multiples lower than ‘normal’ in this phase of the business cycle, we observe no valuation bubble,” it said in a recent note.
Read here: Small, Midcap index: 4 reasons why JP Morgan sees 5-10% more downside risk
Despite a recent short-term correction, domestic brokerage house Anand Rathi expects small- and mid-cap stocks to outperform large-caps over the next year. It cited four compelling reasons for the same:
Historical precedent: The historical trend of mid and small caps overwhelming large caps, particularly observed from 2014 to 2017, provides a strong foundation for this expectation. This historical pattern suggests a tendency for smaller companies to exhibit greater growth potential compared to their larger counterparts.
Bouncing back from slumps: The significant gains witnessed in the past 12 months can be attributed to a rebound from a large underperformance endured in 2018-19, and again in 2022. This recent increase is perceived as a necessary recapture phase rather than an anomaly, indicating potential. for continued growth momentum.
Read here: History repeats itself? Is the rise in mid- and small-cap stocks similar to that of 2018?
Fundamental strength: The growth in medium and small capsules is supported by robust earnings growth, with a compound annual growth rate (CAGR) of 30 percent and 37 percent, respectively, since 2018. In contrast, large capsules exhibited a comparatively modest CAGR of 16 percent. This fundamental strength suggests that smaller companies are poised for continued growth and profitability.
Evaluation Justification: Despite a notable decline in risk-free interest rates, typically associated with higher equity multiples, the valuation metrics for mid and small caps do not appear overly inflated. This suggests that the current valuations are justified by underlying fundamentals rather than speculative froth.
In light of these factors, Anand Rathi recommends a favorable attitude towards medium and small capitals for investors with a horizon extending over the next 12 months. These insights underscore the potential for superior returns and growth opportunities within the mid-cap and small-cap segments of the market.
Read here: Midcap, smallcap could continue to underperform in the near term; this is why
Perspective
Anand Rathi expects the one-year return to be near the long-term average for Nifty 50 and Largecap 100, below the long-term average for Midcap 150, and significantly above the long-term average for Nifty Smallcap 250.
It also sees revenue growth of Nifty 50, Nifty Largecap 100, Nifty Midcap 150, and Nifty Smallcap 250 in FY25 and FY26 to be robust at over 11 percent. In fact, it sees small-cap companies posting strong revenue growth.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 21 Mar 2024, 14:00 IST