Moneycontrol Pro Panorama | ‘Tis the time to cherry-pick stocks

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After all the ranting about a battered stock market and Indian equities being overvalued, Thursday seems to have brought back a smile on the investor’s face. By noon, the BSE Sensex was up by around 490 points and the Nifty 50 by around 200 points. Alarmingly, while the benchmark indices are up by about 1 percent, the small and midcap indices, which fell consistently last week, are up by about 2-3 per cent.

The voices of doom seem to be fading already. What must a retail investor, especially a newbie in equities, do? This question comes to mind given that February marked the third consecutive month of over 40 lakh retail demat accounts being opened. So, it’s a vicious cycle -- more accounts bring more money to fire up markets and rising indices lure more retail investors into D-Street because of the Fear of Missing Out (FOMO) factor.

All macroeconomic data point to India being a great long-term growth story that will gain momentum once the general elections are behind us. So, it may be fool-hardy to unwind completely from equity investments in your portfolio. As investment guru Warren Buffett said – “buy the dip”. It is time to check for hammered stocks that hold value and promise in future.

Indeed, investors are unlikely to err by heeding the SEBI chairperson’s comment that the valuation parameters are off the charts in small and midcaps and appear to be a case of irrational exuberance not backed by fundamentals. This article gives an account of companies in the Rs 25 crore to Rs 50 crore sales bucket and those with annualised sales of Rs 50-100 crore that saw their Q3 FY2024 sales shrink, in the aggregate, from a year ago. Such data of small- and medium-sized companies are publicly available (on the Reserve Bank of India website) for investors to take note of.

The past year's divergence in performance between largecaps, and mid and smallcaps clearly signalled an impending correction in the mid and smallcap stocks. A Motilal Oswal Financial Services note highlighted that valuations of the latter are higher than even their respective long-term (10 year) average, suggesting a reversion to mean.

Investors may do well to review and, if needed, rejig their portfolios, focusing on sections of the market such as the largecaps that have not rallied as much in the past one year. “Invest in lump-sum with a bias towards large cap and multicap strategies, but take a staggered investment approach for the mid and smallcap stocks, over a period of six to 12 months,” says the Motilal report.

Indeed, given the weak governance and lack of liquidity in smallcap company stocks, investors may benefit from taking the mutual fund route. Stringent regulations expected in terms of liquidity stress tests would make investments a tad safer than venturing on one’s own.

Mind you, there is no hurry to rush into equities, given that the overall market valuations have already priced in the positives. Rate cuts, jobs and inflation data of key developed economies and India would offer enough opportunities for retail investors.

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Technical Picks: Kotak Mahindra Bank, HDFC Bank, Intellect and LTI Mindtree (These are published every trading day before markets open and can be read on the app).

Vatsala Kamat
Moneycontrol Pro