Thursday, June 23, 2011

Largecaps or Midcaps?

The hot question buzzing in the market is what to choose in this turbulent time, Large Cap stocks or Mid Cap stocks?

Midcap stocks were already undervalued and the recent correction has made them even more undervalued, but large cap stocks which used to be on the expensive side some time back now looks reasonable. So investors are confused on where to go.

I am a great fan of mid caps as they hold the potential of becoming multibaggers. We cannot expect Reliance Industries, ONGC, TCS, Infosys to become multibaggers in next 2 years as they already have a market cap of above of 2 lakh crores and to become even 2 bagger they need to add another 2 lakh crores to their market cap which is difficult to happen in 2 years time frame. But midcap stocks having market cap of less than 2000 crores can become multibaggers if they are trading at lower valuation and valuation re rating happens in course of next 2 years.

But historically it has been witnessed that midcaps don't perform until and unless the largecap stocks in general have become overvalued. When large cap stock are available at lower valuation bigger investors accumulate them as it provides safety of size and comfort of historical valuation range.

There are many midcap stocks which are trading at PE multiples of less than 4 and Price to book multiples of less than 0.5 but they are barely being looked by anybody as they don't provide easy in-out opportunity and also cannot absorb large amount of liquidity.

Hence at investorZclub we believe that investors should focus only on larger cap stocks for next 6 months, because when market recovers the large caps will recover first and then rest of the market will do the catch up later.

To start with one can try and pick the sector leaders among Telecoms, Auto, Banks, Healthcare, Oil & Gas etc. Sector leaders barely go out investors mind and hence this depressed time is a great opportunity to accumulate them at lower valuations.

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