Stock portfolio bleeding! Will midcap, smallcap shares crash like 2018?
Smallcap and midcap indices should fall at least 5-10 per cent and overvalued stocks should see 10-20 per cent correction going ahead, said G Chokkalingam, founder and MD at Equinomics Research.
- Jul 19, 2024,
- Updated Jul 19, 2024 2:26 PM IST
Record high levels for Sensex and Nifty are masking a steep fall in many small and midcap names that caught small investors off guard recently. Individual portfolios are bleeding and this is reflected in the poor advance-decline ratio of 0.6-0.8 in past few days and slow movement of exchange-level market capitalisations despite record high levels on benchmark indices. Are valuation fears finally gripping the market or it is just profit booking ahead of Union Budget 2024 is one question that is on investor mind.
At last count, 13 per cent of stocks trading on BSE were commanding a trailing price-to-earnings of 100 times or above -- it means investors were willing pay Rs 100 for Re 1 earning that the company generated in trailing 12 months. While largecap stocks are playing a catch up, need not say valuations on several midcap and smallcaps were exorbitant.
On Friday, 875 stocks were quoting higher against 2,926 shares that declined. On Thursday, 2,669 stocks fell against 1,719 that ended higher. Similar weak trends were seen on July 12 and July 10.
"This may be an early sign of fear coming back to the market. Smallcap and midcap indices should fall at least 5-10 per cent and overvalued stocks should see 10-20 per cent correction," said G Chokkalingam, founder and MD at Equinomics Research.
Chokkalingam noted that 2024 is the fifth straight year of smallcap rally. Ever since BSE came out with the BSE Smallcap index, two decades ago, there has been no rally that went beyond four and that only once -- they largely fizzled out in 2-3 years.
"The rally can't continue. This was due. June results can also confirm that as base quarter results for many midcap and smallcaps were high and it would be difficult to maintain that growth levels. I am comfortable with PE of 50 and a profit growth 25 per cent. But you may find it increasingly difficult to get those numbers for many companies," Chokkalingam said.
Chokkalingam said he has a target of 90,000 for Sensex in 2024, all that at expense of midcap and smallcap stocks.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said the recent correction in midcap and smallcap names is healthy and, for now, he has not seen any red flag. He said as long as Nifty holds above the 24,000 level, he sees no steep correction in midcap and smallcap stocks.
Bathini advised investors not to paint every midcap and smallcap stock with the same brush. He called the recent broader market fall as consolidation. "Selective buying is happening at one end, and profit booking is happening on the other," he said.
Bathini said one should not compare the recent small declines with that of 2017-2018 selloff in midcap and smallcap stocks as correction that time was due to 'grandfathering' clause that created a big havoc then. The texture of the market has changed between 2018 and 2024, he said.
"There might be some stocks that have seen a runaway vis-a-vis their fundamentals, yet there are certain pockets which look lucrative in terms of intrinsic value and earnings outlook. It is a consolidation phase. The way the smallcap, midcap and microcaps rallied in last one year, giving away 2-3 per cent from top should not be of concern," he said.
Record high levels for Sensex and Nifty are masking a steep fall in many small and midcap names that caught small investors off guard recently. Individual portfolios are bleeding and this is reflected in the poor advance-decline ratio of 0.6-0.8 in past few days and slow movement of exchange-level market capitalisations despite record high levels on benchmark indices. Are valuation fears finally gripping the market or it is just profit booking ahead of Union Budget 2024 is one question that is on investor mind.
At last count, 13 per cent of stocks trading on BSE were commanding a trailing price-to-earnings of 100 times or above -- it means investors were willing pay Rs 100 for Re 1 earning that the company generated in trailing 12 months. While largecap stocks are playing a catch up, need not say valuations on several midcap and smallcaps were exorbitant.
On Friday, 875 stocks were quoting higher against 2,926 shares that declined. On Thursday, 2,669 stocks fell against 1,719 that ended higher. Similar weak trends were seen on July 12 and July 10.
"This may be an early sign of fear coming back to the market. Smallcap and midcap indices should fall at least 5-10 per cent and overvalued stocks should see 10-20 per cent correction," said G Chokkalingam, founder and MD at Equinomics Research.
Chokkalingam noted that 2024 is the fifth straight year of smallcap rally. Ever since BSE came out with the BSE Smallcap index, two decades ago, there has been no rally that went beyond four and that only once -- they largely fizzled out in 2-3 years.
"The rally can't continue. This was due. June results can also confirm that as base quarter results for many midcap and smallcaps were high and it would be difficult to maintain that growth levels. I am comfortable with PE of 50 and a profit growth 25 per cent. But you may find it increasingly difficult to get those numbers for many companies," Chokkalingam said.
Chokkalingam said he has a target of 90,000 for Sensex in 2024, all that at expense of midcap and smallcap stocks.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities said the recent correction in midcap and smallcap names is healthy and, for now, he has not seen any red flag. He said as long as Nifty holds above the 24,000 level, he sees no steep correction in midcap and smallcap stocks.
Bathini advised investors not to paint every midcap and smallcap stock with the same brush. He called the recent broader market fall as consolidation. "Selective buying is happening at one end, and profit booking is happening on the other," he said.
Bathini said one should not compare the recent small declines with that of 2017-2018 selloff in midcap and smallcap stocks as correction that time was due to 'grandfathering' clause that created a big havoc then. The texture of the market has changed between 2018 and 2024, he said.
"There might be some stocks that have seen a runaway vis-a-vis their fundamentals, yet there are certain pockets which look lucrative in terms of intrinsic value and earnings outlook. It is a consolidation phase. The way the smallcap, midcap and microcaps rallied in last one year, giving away 2-3 per cent from top should not be of concern," he said.