Magical Middle !!!

Date 29th  Oct 2012

Bigger is not better

It has been a mysterious slump for many of the yesteryear stars in the market . Crown jewels have been losing their luster while lesser known mortals have been gaining prominence . This divergence has been the starkest in the  last year , to say the least.

Barring few in the large cap space , the journey has been tumultuous for most . For many stalwarts , behind their glittering facades , the underlying stock performance has been less reassuring and more ominous . The list is long  , but the  prominent ones being Reliance Ind ,Bharti , Infosys , Wipro , R-Com and so on . All of these have delivered negative returns over last year in a market that has delivered over +8% returns ( data as on 26th Oct ‘12) . On the same breadth , many of the small and midcaps have delivered stunning returns . The list is endless on this  count with some notable ones being  Amara Raja Batteries, NIIT Tech , Mindtree , JK Lakshmi Cement etc.

What does this trend portray at deeper levels . One , the well-entrenched myth that the blue chip stocks are safe has been shattered with some family silvers rusting woefully on the corner . Second , law of size probably is catching up on many  bell-weathers , besides regulatory hurdles and macro challenges . Take the case of Reliance Industries .  Story has lost steam with pressure on refining and petrochemicals margin ( accentuated by surplus  capacity in both globally) taking a further toll on the earnings story that is already under threat by declining Oil and Gas production . Neither , the medium term prospects  inspire confidence .

The undercurrent in other cases is equally alarming . While Infosys is haunted by law of size and company specific issues ( management issues) , Bharti  Airtel suffers from regulatory challenges ( spectrum refarming , one time spectrum fee etc) , slowing growth and mounting debt ( piled up on acquisitions) . Wipro is another notable one struggling to regain its lost glory .

In contrast , mid sized companies seems to be in their sweet spot with size playing to   their advantage in a lackluster macro . Mid cap IT exemplifies this more starkly than any other  sector . Surprising  the  market on the  upside , companies like  Infotech  Enterprises , Hexaware , KPIT ,NIIT Tech etc have out-performed consistently over last few quarters . Stunning volume and earnings growth delivered by mid-cap IT companies is not an isolated phenomenon .  Mighty middle is a growing trend in other sectors as well . Many examples come to mind .  Few prominent ones are  Symphony , Finolex Cables , Innoventive Inds , Heritage Food , Sundaram Finance and PVR etc.

When it comes to investments , this middle path has added magic .  Conventional wisdom says that mid & small cap space is risky ( as it is prone to extreme swings) and should be avoided . But , astute investors know this is a myth. Extreme volatility , in many occasions , throw mouth-watering opportunities in terms of distressed valuations in an otherwise fundamentally sound stories . Such stories , when backed up by solid research and purchased at distressed valuations can deliver very high long-term returns , though short-term returns ( notional) could be bumpy . To paraphrase Warren Buffett , “I would prefer a bumpy high return than a smooth low one”.

As market emerges from the shadows of the biggies , middle ground is becoming the new breeding ground for many potential winners . ‘ Middle is mighty‘ is not a passing fad , but a growing trend that will catapult stock specific ( bottom up ) investments to mainstay in the coming times !!!.  Needless  to say , it will be music to ears for staunch value investors !!.

Happy Value Investing !!!

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