Anoop Bhaskar on investing in mid caps

By Morningstar |  23-12-15

The mid- and small-cap universe is fairly large. How do you identify the ones you would want to build your portfolio out of?

If you want a checklist, first check the holding of the promoter. A high promoter stake is better than a low stake.

See whether he is financially trained or technically trained.

Third, what kind of import duties against which they are playing. It's a large part of costs as such, because today that becomes a fairly important part. You don't want to get shocked by something where import duties or imports from China can come in and hit you in one quarter and (you're not alert).

One of the traps most people tend to fall into when looking at small-cap companies is that they focus primarily on just the P&L account. They look at profit growth and they don't see the balance sheet as much. In the small-cap space, most of the reports and the focus is on the nearest quarter number and what the next two quarters' earnings are. People tend to overlook the balance sheet side.

So, it is not rare to find companies which have got lower ratios in terms of ROEs or ROCs when compared to their large-cap peers, trade at higher valuations; because they are not liquid enough, or have earnings momentum on their side for the next few quarters.

So don't focus on just the P&L account, focus on the balance sheet as well and try not to pay more than what's required.

So if you missed a stock, have no regrets. You will find something else coming up. Don't chase something which was at 10PE and now at 25PE, because while the dream sold is that that these are small acorns that will turn into an oak tree, there are very few that actually do.

It's better to leave a lot of acorns on the road or by the wayside and choose them when your downside is more limited rather than thinking that everything you buy will turn into an oak tree.  So for every Sun Pharma, there are several other Shasuns which have stayed where they are.

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