Top picks: Midcap, smallcap stocks to buy as recommended by Edelweiss
Premium- Smallcap and midcap indices have seen a deeper correction than Nifty’s from their respective peaks
Domestic brokerage and research firm Edelweiss believes that smallcap and midcap stocks (SMID) underperformance is yet to play out fully, hence, and its top stock picks are Whirlpool, PVR, Blue Dart, Varun Beverages, PI Industries, Trent and Teamlease.
“As the market battles fears of inflation and recession, SMIDs – particularly small-caps – have taken a much bigger hit than large-caps over the past six months," the note stated.
Therefore, in this note, the brokerage house said it has identified SMIDs that not only have seen valuations correct, but also suffered earnings downgrades, and highlights that a higher share of SMIDs have faced earnings downgrades than large-caps in the half year gone by.
Smallcap and midcap indices have seen a deeper correction (20–30%) than Nifty’s (10%-plus) from their respective peaks. Now, in identifying the beaten-downs, the brokerage finds it vital to split the price declines into valuation-led and earnings-led.
For this, adding beaten downs should revolve around stock price correction—not only valuation-led but also with meaningful earnings downgrades (limits downside); and stocks with consistent earnings upgrades, yet falling valuations (classic mismatch opportunities).
Separately, Edelweiss noted that, during the past six months, a higher share of SMIDs have suffered earnings downgrades than largecaps, thereby presenting a larger universe of beaten-down SMIDs for investors.
“If history were to repeat, then more SMID underperformance is on the cards. We had first published this analysis in mid2019: how NIFTY and SMID indices’ relative performances (2Y/3Y rolling CAGRs) always mean-revert. In other words, usually a large underperformance of any index is made good subsequently," highlighted the brokerage.
The long-term average of this premium/discount is close to zero. Hence, if the historical relationships between the large and SMID indices were to hold true again, then more SMID underperformance is on the cards, it added.
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