Mid-cap stocks to acquire larger mindshare

Srikala Bhashyam

Last week's market trend was a pointer to the fact that predicting the future in equity markets has to be at your own risk. The week was one of the most volatile ones in the last few months amid low volumes. The uptake in trend was seen only in Thursday's trading, on a day when most investors/traders resorted to profit booking.

While every year analysts have been warning that the coming year would be a difficult one to make gains in, the current calendar year is going to pose some challenges for investors. After the smart uptrend in large-cap stocks in the last 12-18 months, the trader interest has shifted to small and mid-cap stocks.

As a result, even on a day when the Sensex lost over 400 points, a number of mid-sized companies posed smart gains with many hitting the upper circuit breaker too. While a good chunk has been on speculative support, the bottomline is that the current year would be a stock picker's game. So, passive investment may not be a smart strategy, particularly for those who bet on large cap stocks at all times.

The support for the theory also comes from the results, with a number of midsized companies clocking a faster growth rate than the larger ones. The story has been true in the case of the technology sector, at least. In fact, many believe that the current year could have the emergence of out-performers from the mid-cap segment in the next couple of quarters.

The argument is that while the US is beginning to get back to its technology spending, the midsized companies would be back in the reckoning due to their boutique-sized operations. The recovery theory has been wellsupported by the managements of large IT companies which have stated during their results conferences that customers are getting back to the spending mode.

while a relatively lower valuation is always a carrot for investors to pick up small and mid-sized companies, caution has to be on the higher side while choosing them. History has shown that investors have often burnt their fingers with smallcap stocks as poorly-managed companies lose during a meltdown.

Interestingly, the lure for small and midcap stocks also exists in various other sectors such as garment, manufacturing and real estate, though the garment sector seems to be a forgotten theme in the recent times. The pressures of the slowdown in the US and appreciating dollar haven't done any good to the sector and investors would be better off with large companies in this space as they have a better chance.

Interestingly, entertainment is another sector which is making noise in the last few months thanks to the recovery in the economy. Most stocks carry a much lower price tag thanks to the steep fall in prices during 2008.

While leaders in the industry are beginning to make a turnaround, it is still a couple of quarters away from offering handsome gains. However, long-term investors can accumulate stocks from the sector as an allocation towards sectoral theme. It is not a bad idea to make some lump sum investments in the sector funds of mutual funds at the current levels too.