Good time to exit Dalal Street's white elephants

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The recent surge in shares of mid- and small-cap companies might just be the right time for investors, who had bought them at peak levels of 2007 and 2008, to sell. Most of them are still trading way below their highest levels about six years ago, but hazy earnings prospects limit the possibilities of further upsides in these shares from current levels.

“Looking at the current state of our economy, it may be sometime before we see fundamentals improve. While some companies’ earnings have hit their bottom and could move up, there are still many which are struggling," said Sandeep Singal, co-head (institutional equity), Emkay Global Financial Services.

From September 03 to date, mid and small-cap shares have outperformed benchmark indices. During the period, the BSE Mid-cap has risen by about 27% while the CNX Mid-cap has rose by 21.5%. The BSE Small-cap index gained 28% while the CNX small-cap index has risen by 31%. Benchmark indices, BSE Sensex and the NSE Nifty rose by 13-16% in the period

Even after the recent gains, close to 50% of the stocks in the BSE midcap index are well below their 2008-peaks with some of them trading as much as 97% discount. Within the BSE Small-cap index, about 60% of the stocks are trading below their 2008-peak levels.

Stocks, which touched all-time highs in December last year, had last touched those levels in January 2008.

“Investors with fresh investment in these stocks may have seen a rise but those who had invested in 2008 are still sitting on losses. This might be a good time for them to move on to better stocks," said Singal.

Retail and the high networth investors (HNI) category are the ones with maximum exposure to these segments.

While these stocks have outperformed the broader benchmark indices since early September, analysts tracking mid-cap companies remain wary.

“One of the major concerns that we have is that the rise in these stocks seems to be speculative in nature. Companies which have not seen much fundamental improvements have seen their stock prices rising," said Ravi Shenoy, AVP-midcaps research, Motilal Oswal Securities.

For investors looking at fresh purchases in mid- and small-cap shares, analysts exporters would be the best bet. But, they insist that investors not just look at valuations but also consider the profit and debt-levels of these companies before an investment decision.

“Some of these companies may have low valuations and look attractive but their debt levels could be higher. Investors need to be wary of such stocks," said Shenoy.