Focus on better risk management: 5 midcap stocks from different sectors with the right financial matrix

We are seeing a mean reversion phenomenon in the markets where the mid- and small-cap indices both peaked in October and are now experiencing a correction at a rate faster than the Nifty said Deepak Jasani, head of retail research at HDFC Securities. Investors display a sentiment of risk aversion and are not willing to wait longer, and hence are pulling out of the market booking profits wherever available or cutting losses.

Unlike last quarter of 2023, when nifty and sensex used to witness correction and mid-cap index was able move higher. Since the start of 2024, the mid-cap index is also participating in the correction, clearly indicating that some profit booking is taking place in this segment of the market. Having said that, if one looks at the flow of money to the mutual funds, a good amount of it is still coming in funds which are focussed on mid or small cap. There is no way one can fight with liquidity, if it is going to mid caps and they are moving up irrespective of valuations or quality of stocks one cannot argue. But the only thing which as an investor one can do is to be careful when taking exposure to this segment of the market. Stay away from stocks where there is a narrative that this sector will do well because of ABCD reasons or the company will get such and such orders worth this much. There is enough evidence in history to show that more than anything else, checks and balances are most important at this point of time, while making investment decisions.

Market has a habit of ignoring all the developments for some time and then one day suddenly getting up to the fact that there is something wrong. Probably what we have seen in the last two weeks in the markets is the same thing, a sudden realization that there are issues like rising inflation leading to higher US rates, geopolitical tension and of course on the domestic front, high valuations. In the last quarter of the current financial year, it is time to take a step back, think and then make a decision both when buying and selling any stock. These selected stocks depict a strong upward trajectory in their overall average score. This implies that there has been a significant improvement in their market outlook in the given time frame.

In this hype, many retail investors are rushing into the market. They may be influenced by the euphoria of Nifty at all-time highs and fear of missing out. However, in this rush to participate and benefit from the markets they are ignoring the risks associated with it. Risk is inseparable from the world of investing.

Last week, the correction started with a private sector bank leading the fall. However, the very next trading session there was a sharp correction in mid-cap index and the markets breadth turned negative. This follow up of correction in a short span is a clear indication that high valuations are a weight on the street mind. This means higher probability of a correction in mid-cap space if there is any trouble with Nifty. So, be cautious while taking exposure as a correction mid-cap is more harsh in terms of price cut on individual stocks.

The way mid-cap stocks have performed in the last few days, it appears that a rotational correction is taking place. The only solace is that the street is rewarding the stock if there is any positive development which indicates that there is still fresh money which is on the sideline which moves into those stocks. But on the other hand, on a day when there is any correction, the cuts are sharper and market breadth turns extremely negative. For investors who have high exposure to mid-cap space, there is one key indicator to watch is FPI flows. But in this time also the analysts are bullish in select midcap stocks from different sectors. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . This predefined screener is only available to ET Prime users.

While the markets have been correcting for some time, the pain of correction has been being felt more in the last three to four weeks. The reason, extremely negative market breadth and that too in the mid-cap segment. Until recently, corrections did not appear to be very obvious because one or the other sector kept witnessing sharp up moves and the whole focus of the market went there. So, sometimes it was railways stocks, sometimes power PSUs which keep the noise levels high. The reality is that corrections come and go, the only thing any investor needs to make sure of is that in any corrective phase, bias when making fresh investment should be toward large cap stocks as there is a possibility that they would see less damage in corrections which are stronger in nature due to global or macro developments. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . The screener applies different algorithms for all BSE and NSE stocks.

Ranging from high valuation to event risks in the current quarter in terms of state elections, the global issues, both geo- political tension and high probability of hike in US interest rates. These all things were being ignored by the markets as the liquidity was ensuring that markets move upward very sharply. Finally, markets are waking up to some reality, there is a very likelihood that as adjustment of the global flows continues to happen, we might have more volatile movement. During this phase, if one is looking for investing, it might be better to stick with large caps as they would be better placed weather the volatility. ET screener powered by Refinitiv’s Stock Report Plus applies different algorithms & filters to all BSE and NSE stocks, and lists stocks which fulfill the various criteria as specified into the algorithms & filters to find those which might help navigate the stock market.

“I do not think anybody is going to wait for the next six months outcome. People are going to rush in and start allocating their longer term bets now and that is what is going on when we talk to the foreign investors. Everybody is asking for new ideas, where they can deploy capital. Sometime back, the conversation was about how much to take off the table, how much cash to sit on but that has all gone in the air now.”