Making money in mid-cap stocks

What does this indicate? When Sensex has fallen over the year, other indices have gained. In simple terms, highly capitalised stocks numbering 30—including the likes of Reliance, Hindustan Lever, ITC, Infosys an d others—have fallen in a year, hundreds of small companies which don’t figure in Sensex but form part of BSE-500 and BSE-200 indices have gained ground. “When stocks of top companies have failed to give any appreciation to investors, hundreds of small companies made considerable gains in the last one year. There are many fundamentally strong companies but with relatively small revenues, profits and market cap listed on the stock exchanges. Investors should target such companies,” said stock dealer Vijay Shah, adding, “some of them are professionally managed companies.”

Says First India Mutual Fund CEO R. Balakrishnan, “I will certainly look at some of the mid-cap companies while investing in the market. There are some very good companies available at cheap rates.” That’s fine. How will an investor identify a mid-cap company for investment? Fund managers say investors should look at companies which are undertaking restructuring or witnessing turnaround. Obviously, these companies should have good business plans and management. “More and more companies have realised that creating shareholders value (or giving a good return through share value appreciation) is a better way to keep investors happy,” said a fund manager.

It’s a tricky thing to buy good mid-cap stocks at the right level. Punters tracking mid-cap stocks reel out any number of such stocks which have gained in the last one year. Alstom Power had gone up from Rs 25 to Rs 80, showing a rise of 220 per cent. Geometric Software had shot up from Rs 52 to Rs 386, an appreciation of 642 per cent. Maharashtra Seamless had moved up from Rs 23 to Rs 123.20, a rise of 435 per cent in a year. Likewise, Honda Siel had shot up from Rs 48 to Rs 116, Camlin from Rs 35 to Rs 130.50 and India Glycol from Rs 18 to Rs 34.50. “Investors who’ve put money in good mid-cap stocks have not lost money,” said a BSE broker, “but one needs to be careful and avoid getting trapped in rigging exercises.”

Investors may see a different story in some of the large cap stocks in the Sensex stable. Some of the large cap stocks in the A group of the BSE have been witnessing huge volatility and fallen of late. Whether it’s large cap or medium cap stocks, buying and exiting at the right level is important. “Given the volatility, however, we have adopted a strategy of booking profits after reaching our targets, rather than hanging on to a particular stock or idea,” says S. K. Mitra of Birla Sun Life in his letter to unit holders.

Moreover, the latest accounting scams in the US have given a good lesson to Indian investors as well. There may not be accounting scams in India in the scale reported in the US, but investors should avoid companies which involve in accounting gimmicks. Many investors have lost money in high-priced initial public offerings, fixed deposits of shady finance companies and debentures floated by companies of dubious standards. Now it may be time to identify good companies which treat investors well and don’t indulge in financial scams.

More than that, stocks are highly prone to manipulation. Investors should examine whether there has been any abnormal price rise in stocks and identify the possibility of riggers resorting to unfair trade practices. Market regulator Sebi recently received several complaints about abnormal rise in prices of B1 and B2 stocks. Says one investor complaint to the Sebi, ‘a cartel of brokers and fund managers are involved in manipulative and unfair trade practices. The modus operandi adopted by them is, first to appoint their agents in various cities, who in return appoint small brokers and sub-brokers in small cities for luring investors. These agents along with the main brokers based in Mumbai, Delhi and Kolkata, entice small investors to buy low value shares assuring them a return of 20-24 per cent per annum plus a share in the profit.

All these entities then indulge in circular trading among themselves to manipulate the share price. At the end, the cartel offloads the shares to gullible investors at exorbitant prices’.

Stock markets are mine fields for investors. If they are not careful, there will be explosions. The bottom line is: Be careful while investing in mid-cap stocks.