Small and midcap stocks in this sector are buzzing, should you invest?

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Investors are getting handsomely rewarded for taking higher risks and betting big on small and midcap stocks. Nifty Midcap 100 rallied 2.11% and the Nifty Smallcap 100 index surged 4.77% in a fortnight at a time when the benchmark index Nifty50 rose just 0.11% in a highly volatile market.

Shares of many small and midcap companies have shot up in the last two weeks on hopes of significant improvement in their future cash flows.

“While some of them have good Q4FY21 results as tailwinds, some others are relying on policy changes at the local or global levels as triggers for improvement. The prospects of most of these recent highflyers may not have changed dramatically which can justify a sharp jump in their stock prices in such a short span of time,” HDFC Securities said in a report.

The brokerage has made a list of 20 better known mid and smallcap stocks that have gained more than 20% in this period with 17 out of these 20 stocks belonging to the chemicals/pharma space. The recent positive trigger in this space is due to China+1 strategy adopted, commodity price uprun and Covid-19 related demand upsurge.

(Source: HDFC Securities)

While some of these companies will sustain and grow from these levels, most stock prices have probably may correct/consolidate for a long time before rising further.

The brokerage firm says that investor should be wary of liquidity/depth as it is an important parameter while investing in this space. Also, technological disruption and speed of change accelerating may make many of today’s successful business models irrelevant in times to come.

“One should calibrate your exposure in select midcap and smallcap stocks as per risk appetite and asset allocation plan. It is a good idea to accumulate the selected stocks via SIP mode rather than putting a large amount in stock in a lumpsum at one go. Refrain from buying small and midcap stocks just based on hearsay/tips or momentum in the sector,” the report noted.