Mid Cap to Large Cap is a potent investment strategy

By Morningstar |  07-01-20 | 
 

In a quick note for mid-cap investors, DSP Mutual Fund looked at data wearing a probability hat and concluded that there is a 4:1 chance of a mid cap becoming a small cap than becoming a mega cap. Hence there is a greater chance of a mid cap destroying value rather than creating value.

Motilal Oswal, in its 24th Annual Wealth Creation Study looked at data over the 5-year period spanning 2014 to 2019, and concluded that mid caps becoming large caps is where the money is made.

  • Large-cap stocks – Mega stocks (Top 100 stocks by market cap rank)
  • Mid-cap stocks – Mid stocks (Next 200 stocks by market cap rank)
  • Small-cap stocks – Mini stocks (Below the top 300 rank) 

Mini companies

  • In 2014, there were 3,159 Minis
  • No company moved from Mini to Mega by 2019
  • 42 Minis moved to Mid (CAGR of 43%)
  • 2,481 Minis stayed as Mini (CAGR of 11%)
  • 636 companies were merged or de-listed

mini to mid

Mid companies

  • In 2014, there were 200 Mid
  • 14 moved to Mega by 2019 (CAGR of 34%)
  • 103 Mid stayed as Mid (CAGR of 18%)
  • 79 slipped to Mini (CAGR of -11%)
  • 4 companies were merged or de-listed 

mid to mega

Mega companies

  • In 2014, there were 100 Mega
  • 75 stayed as Mega (CAGR of 12%)
  • 22 slipped to Mid (CAGR of 1%)
  • 3 slipped to Mini (CAGR of -20%)

Note: During the 2014-19 period, the Sensex CAGR was 12%. The above return is the average over this 5-year period.

Takeaways

  • Mid-to-Mega is a potent investment strategy
  • Companies leap-frogging from Mini to Mega is very rare.
  • A fair number of companies move from Mini to Mid and deliver supernormal returns. However, they need to be identified from a large base of about 500 companies.
  • The most potent and focused hunting ground for high-performing stocks is the Mid category (200 stocks with market cap rank 101 to 300.)
  • Over the next 5 years, 15-20 of these stocks will cross over to the Mega category and deliver handsome returns in the process.
  • To see which companies made money and created wealth, read Which stocks made investors rich.
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