Fall in midcap stocks: Key parameters to consider before buying

This steep fall in midcap stocks is the result of profit-booking due to the huge jump in the last one year. The Nifty Midcap index had outperformed the benchmark in the past one year, rising nearly 80% against the 51% rise in the Nifty 50.

Further, according to analysts, the overvaluation of midcap stocks may not be justified by their fundamentals, which could lead to the current correction in midcap stocks.

The overall market sentiment is also down since FIIs became net sellers in October, which has impacted the broader markets.

Analysts expect quality midcaps to outperform large caps in the long term, but these stocks are likely to remain volatile in the near future. They recommend using these dips to accumulate quality midcap stocks instead of panic selling.

Since midcap stocks can be more volatile than large-cap stocks, it is very important for investors to choose the right midcap stocks to invest in at such times to avoid huge losses in future.

But how to choose the right midcap stocks for investment? Here are some things investors should keep in mind before investing in midcap stocks.

Liquidity: Many midcap stocks do not have adequate liquidity. This means that they do not regularly trade large volumes. If an investor buys midcap stocks with low liquidity, it may be difficult for them to get rid of it in case of an accident. Hence, an investor should focus on midcap stocks where liquidity is not an issue. He can look at stocks that are part of major midcap indexes as these are more well known among investors and are actively covered by analysts.

Transparency: This is another important feature one must keep in mind before investing in midcap stocks. Only midcap stocks whose regular analyst meetings, conference calls, earnings reports are not delayed and are covered by the brokerage should be looked at. These stocks are more transparent and their fundamentals will be easier to track and analyze. Plus, more brokerages will cover these stocks, giving investors a more detailed analysis and helping them make the right decisions.

herd mentality: Never buy midcap stocks just because everyone else is buying. Many a times investors get influenced by tweets, WhatsApp messages where multiple people are buying a certain stock. It is important not to be deceived by the popularity of a stock and do your own research to make an informed decision.

Income and other research: Before investing in any stock, it is important to have a look at their last 5 years earnings. While it’s important that the company posted strong earnings growth over the past few quarters, it’s also important to examine whether its rise over the years has been consistent. Focus on companies that have seen steady growth over the years and have been less affected by sudden economic concerns. Not just earnings, investors should also look at stocks with strong management, small debt, expansion plans, etc. before investing in midcap stocks.

past performance: Investors should also take a look at how the stock has performed over the years. It is advisable to invest in such stocks which have shown resilience to market volatility and have outperformed the markets during crashes. Stocks that are less affected by market volatility and are able to hold their own during those times are considered better investments.

Holdings: Another important factor to consider is the ownership of the stock among the promoters, FIIs, Mutual Funds, DIIs etc. Invest in those stocks where the holding of MF, FII, DII is continuously increasing instead of decreasing. Also, invest in stocks with major promoter holding like 35-40 per cent as it shows their commitment to the firm. Therefore, it is important to go through the shareholding pattern of the stock for the last few years before buying.

future upside down: Before investing in midcap stocks, investors should contact their brokerage or research other brokerage reports to ascertain the upside potential of the stock. Brokerages consider several factors like technical ratio, earnings, management before deciding the upside potential of a stock. Hence contacting your brokerage along with some brokerage reports can help you make the right decision.

Peer comparison: Investors should also compare the fundamentals and technicalities of the stock they are interested in buying against their peers. Instead of buying the first good stock in front of you, compare P/E ratio, ROE, past performance, fundamentals and choose the best performer.

Midcap stocks have great growth potential and can be used as a diversification tool for your portfolio. However, since the return potential is high, there is also risk as it can be heavily influenced by market volatility. Hence only investors with moderate to high risk appetite should consider investing in these stocks.

However, if you choose to invest in midcap stocks, keep the above parameters in mind and do a thorough research to choose the right ones that perfectly fit your portfolio, financial goals and investment horizon.