Just 10% of midcap, smallcap stocks defy the fall in May; analysts suggest these stocks to buy now

Just 10 per cent of stocks in the BSE Midcap and Smallcap managed to deliver a double-digit return to investors in May so far. This shows the kind of weakness in the broader markets that have underperformed the benchmark equity indices during the month.

Market watchers believe that a couple of factors including rising concern over inflation, surprised rate hike by the Reserve Bank of India (RBI), sustained selling pressure by foreign institutional investors and mixed quarterly results weighed market sentiment during the month.

Overall, the BSE Midcap and Smallcap have cracked 7 per cent and 8 per cent, respectively, on a month-to-date basis. On the other hand, the BSE Sensex declined 4.81 per cent during the same period. Overall, as many as seven stocks in the BSE Midcap and Smallcap indices have delivered over 10 per cent return to investors in May so far, while 97 others stocks in these indices have managed to keep their heads above water.

While commenting on broader space, market veteran Shankar Sharma, vice-chairman and joint managing director, First Global told Business Today that midcaps and smallcaps are the areas where you will make outsized returns as many companies are doing very well. However, he added that just because companies are fine does not mean the stock price cannot fall. It is a long-term phenomenon.

With a gain of 23.80 per cent in May so far, TD Power Systems emerged as the top gainer on the list. It was followed by Gokaldas Exports (up 16.10 per cent), Honda India Power Products (up 16 per cent), Gujarat Gas (up 15.40 per cent), Sharda Cropchem (up 13.90 per cent), Vadilal Industries (up 13.40 per cent) and Mangalore Refinery and Petrochemicals (up 10 per cent).

How to pick stocks from broader markets?

The stock market is complex and volatile. To make smart returns, one should know the pulse of the market and understand how it functions.

Ravi Singhal, vice chairman, GCL Securities, said that there is no proven strategy to maximise returns from stock. However, there are a few ground rules, if followed can be instrumental in reducing risk and earning better returns.

He advised investors to invest in businesses about which one has thorough knowledge. “Investing in a diversified portfolio of stocks can help in mitigating risk and maximise return,” Singhal added.

For beginners, it is suggested to invest in large-sized companies, as it limits the risk. The size of the company can be calculated with the help of market capitalisation. Singhal further said that investors should also focus on valuation before picking the stocks. 

“For beginners, it is advised to invest in stocks with a P/E of 10-25. One should also zero in on companies that have given consistent results in the past,” he said. 

It is advisable to invest in the stock of companies that has limited liability. It can be evaluated with the debt-to-equity ratio, which is a comparison of the total liability of a company by its shareholder’s equity. A higher debt-to-ratio connotes more leverage in a company and such stocks should generally be avoided.

Stocks to buy

In the midcap and smallcap space, brokerage Motilal Oswal Financial Services is positive on Ashok Leyland, Macrotech, APL Apollo Tubes, Chola Finance, Indigo Paints, Restaurant Brands, TCI, GR Infra, Dalmia Bharat, Lemon Tree and Angel One.

On the other hand, brokerage Anand Rathi Share and Stock Brokers is positive on Vinati Organics with a target price of Rs 2,350. “We are positive on the long-term performance of Vinati and expect revenue, EBITDA and PAT to clock 27 per cent, 34 per cent and 32 per cent CAGRs over FY22-24 considering strong demand driven by a pick-up in butyl phenols, antioxidants and ATBS utilisation,” the brokerage said.

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