14 September 2023
Are mid and small cap stocks excessively costly
Being a research analyst places us in a favorable position to assess investor sentiments and gauge stock valuations. We're observing an increase in subscriptions and a significant uptick in stock queries, indicating a rising investor interest.
Furthermore, we maintain a watchlist based on solid stock fundamentals, favorable financial results, and compelling narratives. This watchlist has shown steady expansion, growing from 127 stocks a year ago to 189 stocks following the release of results on June 30, 2023. This growth serves as a strong indicator of the improving corporate fundamentals. Notably, the surge in stock numbers has been tilted towards medium and small-sized companies since the publication of the quarterly results on December 31, 2022. The appreciating share prices have unequivocally validated this trend over the past six months.
The infrastructure industry has recently delivered impressive financial results over the last few quarters and is currently brimming with orders. Many companies within this sector have managed to maintain low levels of debt. In Electronics Manufacturing Services (EMS), most firms are relatively small but have established a strong presence in the market, with experienced promoters at the helm. These companies have secured orders spanning multiple years and maintain healthy balance sheets. In the Space and Defence sectors, state-owned enterprises (PSUs) appear to be overvalued, whereas smaller players are positioned more favorably in their market valuations. The Power sector, particularly companies specializing in Solar and Wind power generation equipment and related entities, has the potential to be a surprise contender, often referred to as a "Dark Horse." Regrettably, publicly traded companies operating in Wind energy are currently overvalued. On the flip side, the Paper sector appears to be overpriced.
While it is true that overall valuations are relatively elevated, they have not reached a level where we can confidently label it as a bubble. It's worth noting that bubbles have formed in the realm of penny stocks within the individual stocks category.
In summary, we do not currently observe any major red flags, but exercising caution is prudent. Investment decisions should be grounded in improving fundamentals rather than mere expectations.
Dr. Anil Kumar Asnani
SEBI Reg. Research Analyst