‘SMALL IS BEAUTIFUL’

DATE:2 April 2007

“Small is beautiful” is a famous saying of Economics. But over here it means increasing the proportion of valued and growth mid cap stocks in the portfolio. At a birds eye view the reason for it can be seen that the midcap stocks are available at cheaper PEs rather than blue chip companies which are currently running at PE of around 21. If one excludes heavyweights like ONGC SBI the mammoths that have a heavy weight in SENSEX and are Navratnas trailing at single digit PE, suddenly SENSEX looks overvalued against the midcap stocks. When markets fell, the midcap started facing declining trend, and the worst was these stocks had beta of more than 1 which meant for every Ruppee1 correction in SENSEX these stocks fell more than Rs1. So this downward trend in past has made mid caps attractive to clients who prefer high risk and high returns. Studies of technical charts also suggest that when markets fall, mid cap face more brunt. But once the markets become favorable the mid cap stocks offer higher returns because of their strong fundamentals and robust earnings and growth potential. A look in the past can give us an evidence of the fact. In 2006 when markets reached 8000 levels, the mid cap corrected more than 38% and their PE was as high as 28-29 more than their parent stocks. But in the current year, with renewed buying seen in blue chip stocks, mid cap may be seen rising further. Moreover these stocks have recently made new highs; despite of this fact they are trialing at PE of around 20 which means there have been an increase of around 40% in combined earnings. Moreover, the results are not biased as companies have low weight as low as less than 2%, as compared to SENSEX where ONGC, SBI, RIL have huge weights. So overall the mid cap segment has performed well and will sustain its robust earnings. And coming back to Beta in rising market again, these stocks will rise more than Rs 1 for every Re1 increase in SENSEX stocks. So, one could certainly look these as buying opportunities into mid cap segment, as the stocks are at very low levels and cannot be expected to decline further . However one has to cautiously select the scrip’s to invest in, and one should avoid random picking and select only those companies which have sound track record, growth potential and dynamic management.