Cherry-picking Fallen Angels — Part 1

Mid-cap stocks have corrected much more than the broad market. Where should you bottom-fish?


Following an unrelenting rise over the past 18 months, the winning streak for small and mid-cap stocks has come to an end. Since the beginning of this calendar year, BSE Small-Cap Index and Mid-Cap Index have fallen by 20% and 15% from their respective highs. May was the worst month for mid-caps in the past one-and-half years with the index plunging by 6.8%. A cloud of uncertainty now looms over these indices with several coveted names no longer being investor favourites.  

Till December last year, mid-caps and small-caps had a great run due to the good macro-environment and fund flows. Over the past six months, micro-environment has improved but macro has become challenging. A weakening macro-environment triggered by increasing crude prices and depreciating rupee has fuelled market volatility forcing investors to take shelter in large-cap stocks. “When liquidity tightens, interest rates start rising and inflation returns. In an increasing interest rate scenario, the equity valuation in terms of multiple takes a beating and it’s usually the mid-cap universe that suffers more than large-caps,” says Pankaj Tibrewal, equity portfolio manager, Kotak Mahindra AMC. In the mid-cap space alone, 55 stocks plummeted between 10%-30% and another 24 fell by 30% or higher. 

That fall was not only due to the change in market sentiment. Re-categorisation of mutual fund norms has also contributed to the fall. Fund managers had to re-arrange their portfolio after Sebi-issued new guidelines for categorisation of mutual fund schemes. The mid-cap segment now includes the 101st to 250th stock ranked by market capitalisation. The 100th stock by market capit


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