Good time to sell out of D-Street's white elephants?

Looking at the current state of our economy, it may be sometime before we see fundamentals improve, says Sandeep Singal, Emkay

The recent surge in shares of mid- and small-cap companies could be the right time for investors who had bought these at the peak levels of 2007 and 2008 to sell. Most are still trading way below their highest levels but hazy earnings prospects limit the possibilities of further upsides in these shares from the current levels.

“It could be some time before we see fundamentals improve. While some companies’ earnings have hit bottom and could move up, still many are struggling,” said Sandeep Singal, co-head (institutional equity) at Emkay Global Financial Services.

From September 3 till date, mid- and small-cap shares have outperformed benchmark indices. During the period, the BSE Mid-cap rose 27 per cent, while the CNX Mid-cap gained 21.5 per cent. The BSE Small-cap index gained 28 per cent, while the CNX Small-cap index rose 31 per cent. The benchmark indices — the BSE Sensex and the NSE Nifty — rose 13-16 per cent during the period.

Even after the recent gains, close to 50 per cent of the stocks in the BSE Mid-cap index are well below their 2008-peaks, with some trading at as much as 97 per cent discount. Within the BSE Small-cap index, about 60 per cent of the stocks are trading below their 2008-peak levels.

Stock, which touched all-time highs in December last year had earlier touched those levels in January 2008. “Investors with fresh investment in these stocks may have seen a rise but those who had invested in 2008 are still sitting on losses. This might be a good time for them to move on to better stocks,” said Singal.

The retail and the high net worth investors categories are the ones with the highest exposure to these segments.

While these stocks have outperformed the broader benchmark indices since early September, analysts tracking mid-cap companies remain wary. “One of the major concerns we have is the rise in these stocks seems to be speculative in nature. Companies which have not seen much fundamental improvements have seen their stock prices rising,” said Ravi Shenoy, assistant vice-president (Midcaps Research) at Motilal Oswal Securities.

For investors looking at fresh purchases in mid- and small-cap shares, analysts said stocks of export-oriented companies would be the best bet. However, they insist investors not just look at valuations but also consider the profit and debt-levels of these companies before an investment decision.

“Some of these companies may have low valuations and look attractive but their debt levels could be higher. Investors need to be wary of such stocks,” said Shenoy.