As the name suggests, a mid-cap company is in the middle of the pack, between large cap and small cap companies. Mutual funds which diversify investments in between mid and small cap companies are termed as mid and small cap funds.
Here is an interesting article written by our Fund Manager “Atul Bhole” on “Case for mid-cap investing” for the Hindu Business Line.
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Case for mid-cap investing
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Monday , February 24, 2014
Case for midcap investini (also see in Jpeg)
Publication: The Hindu Business Line , Journalist:ATUL BHOLE, Edition:Pune/Delhi/Hyderabad/Chennai/Ahmedabad/Mumbai/Bangalore/Kolkata , Page No: 7, Location: MiddleCenter , Size(sq.cms): 320
Case for midcap investinig
ATUL BHOLE
The Nifty and Sensex are close
to their previous highs.
However, the CNX Midcap and
BSE Midcap indices are still
hovering between 21 per cent
and 37 per cent below their
previous highs. These stocks
provide a good investment
opportunity over the next 1824
months.
Wellrun midsized companies
have historically delivered phe
nomenal returns over longer
time periods. Many such firms
are driven by competent and
motivated entrepreneurs. They
d e v e l o p c o s tefficient
structures, brands and
distribution franchisesgrowth
while maintaining good return
ratios.
Midcap companies typically
trade at a discount to their
largecap counterparts. When a
g o o d q u a l i t y m i dsized
company delivers consistent
growth, returns from such a
company can be twof o l d —
through normal earningsled
gains and rerating of valuation
multiples.
The figures in the table are
based on market close as on
January 31, 2014. The stocks
a n d r et u r n s a r e f o r o n l y
illustrative purposes and
should not to be construed as
investment advice.
Worth exploring now?
The discount between mid and
largecap stocks is currently rul
ing at 2530 per cent, higher
than the historical averages of
1520 per cent. Many midcaps
are tradi n g a t 911 times the
forward multiple, compared to
the historical averages of 1213
times. With sentiments improving,
these midcaps have very good
odds of bouncing back to
historical average valua
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tions and providing superior re
t u r n s . H o w e v e r , b o t t o mup
stock picking will be of
importance. Along with
sentiment improvem e n t , o n
g r o u n d e c o n o m i c r ecovery,
coupled with rates coming
d o w n o v e r t h e n e x t 1 824
months, can provide relief to
cert a i n m i dcap companies.
D u r i n g t h e r u nu p t o t h e
recovery, today's concerns
s u c h a s e l o n g a t e d w o r king
capital cycle, depressed growth
rates and margins can improve
and provide bigger upsides to
the profitability of midcap
companies.
Essentials for investing
The company's business and
the market structure in which it
opera t e s o u g h t t o b e
understood. Good
managements with competence
and integrity are essential.
Bottomup stock selection is
important even when one is go
ing by the topdown theme. Be
it consumption, export or infras
tructure, any midcap company
should be judged on a
standalone basis. Investors
should lend a
careful look at parameters such
as margin defence, return ratios,
cash generation and capital
alloc a t i o n d e c i s i o n s o v e r a
period of time.
Midcaps should be examined
on at least two valuation
parameters P/E or P/B ratio or
EV/EBITDA or DCF valuation.
This exercise will help capture
the risks exhaustively.
Once an investing decision
has been taken, it is about
patiently w a t c h i n g t h e
investment grow for years.
Finally what about risk and
volatility in midcaps?
If the stock selection is done
properly, the degree of risk
reduces notably. Secondly, if one
has invested for a long period
with conviction, the riskreward
ratio will improve. One can actually
use market volatility to add up
good quality midcaps.
Also, spread the risk across a
number of midcap companies.
(The writer is Fund Manager of
Tata Mutual Fund)