This story is from October 10, 2007

Invest in medium and small stocks

T Surendar / TNN / Oct 10, 2007, 00:16 IST

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According to a stock market analyst, investors should look for good stocks below the radar of large fund managers.

MUMBAI: If you sail a small boat, what do you do in choppy seas complete with high tidal waves? You could dive deep to stay off turbulence on the surface and spare being thrown around. Apply the strategy to the volatile stock markets, and you may still have an opportunity to weather the storm.
Consider this. Since July, the benchmark Sensex shot up 22% while the index for medium-sized companies represented by the BSE midcap index rose only by 11.7%.The index for BSE smallcap stocks rose 13.6%. In other words, stock prices of medium and small companies moved far slower than their larger counterparts. Fund managers see an opportunity here.
Says Samir Rachh, fund manager, Emkay PMS: "As the trading gets more institutionalised, the focus is on the top 100 stocks. Investors should look for good stocks below the radar of large fund managers."
Think of FIIs as large whales, who have a big appetite. In the last couple of days, as they poured big money, they lapped up frontline stocks making some of them look expensive. Their logic was simple. Should there be any shock in the system, the more liquid large stocks will allow them a quick exit. With the action diverted, the medium and small cap stocks seemed lost for attention.

Says another fund manager in one India's largest mutual fund: "After a while, the action is bound to trickle down the smaller companies. After all, it is some of these companies that will eventually become large cap stocks."
How do investors pick these businesses? Rachh says that today there is a premium for growth and size, rather traditional value based investing. For example, though oil companies like BPCL and HPCL may be valuable based on their assets, investors aren't buying these stocks as they can't see a growth story for these companies.

Instead, smaller businesses like Educomp and Elecon Engineering have risen faster, on the basis of growth plans and healthy order books respectively. Says Bharat Shah, CEO and MD of ASK Investment Manager, who manages over $600 million: "Today, growth is an important subset of value. There is value only if there is real growth."
Shah, one of India's earliest fund managers, says, to make money, investors should have the stomach for quotational losses. He advises that the popular PE ratio is an inefficient metric to value stocks.

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