Be watchful before buying Mid cap & small cap in 2016
14 Jan 2016
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Small-cap and mid-cap shares could see a fall if the companies don’t match with earnings and profits.

After two years of good performance, the price to earnings (PE) multiple of mid-cap and small indices have soared past that of the benchmark Sensex and Nifty. The PE multiple of the NSE Midcap 100 index, for instance, is currently 23 per cent more than the Nifty.

If past records of stock markets are seen then the small and mid-caps have been traded at a discount of 5 to 20 % to large-caps but currently mid-caps are actually trading at a premium, which is a risk. A sharp increase in valuations of small-cap and mid-cap companies over blue-chips is a signal for an impending correction. Lack of earnings support, could trigger sell off.

In 2014, when Sensex gained 30 %, the small and mid-cap indices had both soared over 50 %. In 2015, when the Sensex fell 5%, the BSE Smallcap and Midcap indices had gained around 7%.
Also, a large part of the mutual fund inflows seen last year went to mid-caps. Experts think 40-50 per cent of MF flows might have got invested in small and mid-cap companies.

Not all mid cap and small cap stocks are stretched but due to few strong mid cap companies entire pack has been up and now it is the time for them to correct.

Both S&P BSE midcap and smallcap indices plunged over 2 per cent in Thursday's trade. As many as 40 stocks hit their 52-week lows on the S&P BSE smallcap index, which included names like Aban Offshore, ABG shipyard, Andhra Bank, Den Networks, Dena Bank, Jubilant FoodWorks.
Smallcap and midcap indices did outperform Sensex in calendar 2015, supported by strong flows from DIIs. Riding the tide, most of the smallcap names surged quickly on hopes of a strong recovery in the economy

The resultant impact is seen in high valuations in most of the smallcap and midcap names. Earnings are yet to catch up, and if the global environment remains stable, it could very well happen in the second half of 2016. Till that time, be wary of the midcap and smallcap stocks, which might fall under their own weight.

The S&P BSE midcap index rose about 10 per cent compared with a 5 per cent fall in the S&P BSE Sensex during calendar 2015. Analysts do not suggest shunning the midcaps altogether after the recent rally, but they advise caution in stock picking. Not every midcap stock made money in calendar 2015.