Did mid-caps create alpha, with Nifty at 24,000?

2 Jul 2024 , 11:25 AM

DID MID-CAPS REALLY CREATE ALPHA FOR INVESTORS?

Mid-cap stocks have not had the best of times in the recent past. SEBI had come down heavily on the volatility in mid-cap stocks to protect the interest of small investors. In addition, it had also urged the mutual funds to go slow on retail flows in their mid-cap and small cap funds to avoid a valuation bubble. To add to that, the regulator also imposed other stringent measures like upfront margins, additional special margins etc which made trading in mid-caps costlier and also tougher. That brings us to the big question; did mid-caps create alpha in the Nifty journey to 24,000. The answer is an emphatic YES.

What has been the mid-cap story in the Nifty’s journey to 24,000. If the Nifty has given beta returns, it is the mid-cap index that provided the alpha. Here are some very interesting takeaways from the analysis of the mid-cap index in the last one month and one year.

• If you look at returns on a 1-month period, the Nifty Mid-Cap 100 index has given 6.93% returns in the last month, when the Nifty has journeyed to 24,000. At the same time, there are 16 companies giving more than 15% in a month and 33 companies in mid-caps giving more than 10% in the last 1 month.
• If you look at 1-year returns, the Nifty Mid-Cap 100 index has given a healthy 56.91% returns, more than twice the returns given by the Nifty in the same period. Believe it or not, there are 25 midcaps that have given more than 100% returns in the last one year, while 46 companies gave more than 50% returns. A total of 63 mid-cap companies beat the Nifty returns, so even if you had selected a mid-cap stock at random, there was a 66% probability that you would have beaten the Nifty index.
• The Mid-cap index has bounced 55.55% from the lows of the year and it is just about 0.34% short of the 52-week high. As far as the index is concerned, it is resilient and also has the swing factor in its favour. But, what about the individual mid-cap stocks?

Let us first look at how the mid-caps did in terms of 1-month returns.

HOW MID-CAPS PERFORMED IN LAST 1 MONTH TO NIFTY PEAKS

Let us start with the momentum story of Nifty Mid-Cap 100 Index using 1-month returns as the proxy. For the Nifty Mid-Cap 100 index as a whole, monthly returns were 6.93%. Out of the 100 stocks in the Nifty Mid-Cap 100 index, 5 stocks were eliminated due to paucity of full year data. Of the remaining 95 stocks, only 71 stocks gave positive returns while 24 stocks gave negative returns in the last one month, as Nifty touched 24,000.

Stock Symbol	Market Price	1-Month Return	1-Year Return	52-week High	52-week Low	Bounce from Low	Distance to High
FACT	983.90	42.31%	114.18%	1,187.00	413.15	138.15%	20.64%
OFSS	9,884.00	30.84%	157.67%	10,050.00	3,737.25	164.47%	1.68%
DIXON	11,966.80	29.58%	174.45%	12,149.00	3,953.00	202.73%	1.52%
MAZDOCK	4,282.10	27.52%	245.25%	4,584.00	1,230.00	248.14%	7.05%
KALYANKJIL	502.90	26.94%	253.05%	546.00	135.55	271.01%	8.57%
PRESTIGE	1,889.95	25.75%	227.55%	2,074.80	521.20	262.62%	9.78%
LICHSGFIN	797.95	23.19%	102.77%	809.90	382.70	108.51%	1.50%
JSWENERGY	731.50	21.57%	170.29%	750.00	268.60	172.34%	2.53%
IDEA	17.90	20.88%	140.13%	19.18	7.15	150.35%	7.15%
MAXHEALTH	943.80	19.22%	55.92%	979.90	508.50	85.60%	3.82%

Data Source: NSE

What are the sectors that are showing momentum in the last one month. The momentum appears to be very stock specific, with no sectoral trends visible. The range is quite wide with FACT from fertilizers, OFSS from IT, Dixon from outsourcing, Mazagon Docks from Defence, Kalyan Jewellery from fashion, Prestige from realty, LIC Housing from home finance etc. it is an absolute agnostic mix of stocks, bottom-up. A toral of 9 out of the 95 stocks evaluated gave more than 20%, while 33 stocks in the Nifty Mid-cap 100 index gained more than 10%.

What about the laggards in the Nifty Mid-Cap 100 index on one-month returns? The laggards were largely news driven. The worse performers of the month were stocks like IPCA Labs, Union Bank, Poonawalla, SAIL and Bank of India. The top 10 mid-cap stocks generated average returns of 26.78% for the month while the top 20 stocks generated average returns of 20.94%. The bottom 10 stocks generated -7.60% returns.

HOW MID CAP STOCKS PERFORM ON 1-YEAR RETURNS?

The fundamental story of mid-caps is better captured by 1-year returns. The Nifty Mid-Cap 100 index saw annual returns of 56.91% for last one year. Out of the 95 stocks in the Nifty Mid-Cap 100 index with full data available, 83 stocks gave positive returns and only 12 stocks gave negative returns in the last one year.

Stock Symbol	Market Price	1-Month Return	1-Year Return	52-week High	52-week Low	Bounce from Low	Distance to High
BSE	2,578.80	-2.07%	320.10%	3,264.70	606.10	325.47%	26.60%
BHEL	301.20	2.30%	253.73%	322.50	84.50	256.45%	7.07%
KALYANKJIL	502.90	26.94%	253.05%	546.00	135.55	271.01%	8.57%
MAZDOCK	4,282.10	27.52%	245.25%	4,584.00	1,230.00	248.14%	7.05%
RVNL	417.00	10.87%	238.70%	431.80	117.05	256.26%	3.55%
PRESTIGE	1,889.95	25.75%	227.55%	2,074.80	521.20	262.62%	9.78%
SJVN	131.50	-5.78%	224.61%	170.50	40.25	226.71%	29.66%
OIL	723.00	13.49%	197.80%	743.60	241.10	199.88%	2.85%
DIXON	11,966.80	29.58%	174.45%	12,149.00	3,953.00	202.73%	1.52%
JSWENERGY	731.50	21.57%	170.29%	750.00	268.60	172.34%	2.53%

Data Source: NSE

Are there are any sectoral themes in the mid-caps in terms of one-year returns? PSUs as a theme still dominated the 1-year returns. PSU continues to be the dominant theme with 5 out of the 10 being PSU stocks. This includes BHEL, Mazagon Docks, RVNL SJVN, and Oil India Ltd. Out of 95 stocks evaluated in the Nifty Mid-Cap 100, a total of 25 stocks in the Nifty-Mid-Cap 100 generated more than 100% returns. At the same time,  46 out of the 95 companies generated over 50% returns. A total of 70 out of the 95 companies yielded more than 20% returns. Even if you had selected a mid-cap index stock at random, there was 74% probability that it would have bettered other asset class returns.

What is the story of the laggards in the Nifty Mid-Cap 100 index on one-year returns? The bottom list is largely news driven, with no sectoral theme. Paytm was the big laggard after the business gradually started to unravel post the RBI ban on the payment bank business. Dalmia Bharat has been under pressure after guidance pressures and after losing the JPA capacity addition. The travails of Zee is well known. There are a number of small finance banks that find itself on the wrong side of the risk scale.

HOW RESILIENT WERE THE MID-CAP STOCKS IN LAST 1 YEAR?

How exactly do we measure resilience of stocks. We look at resilience in terms of the extent of bounce from the lows of the year, which is a good proxy. For the Nifty Mid-Cap 100 index as a whole, the bounce from the low of the year was a full 55.55%. Out of the 95 stocks evaluated in the Nifty Mid-Cap 100 index, an amazing 28 stocks bounced more than 100% from the lows, while 58 stocks bounced more than 50% from the lows and a total of 87 stocks showed a bounce of at least 20% from the lows of the year. That is huge.

Stock Symbol	Market Price	1-Month Return	1-Year Return	52-week High	52-week Low	Bounce from Low	Distance to High
BSE	2,578.80	-2.07%	320.10%	3,264.70	606.10	325.47%	26.60%
KALYANKJIL	502.90	26.94%	253.05%	546.00	135.55	271.01%	8.57%
PERSISTENT	4,275.00	16.21%	-13.01%	4,285.00	1,158.59	268.98%	0.23%
PRESTIGE	1,889.95	25.75%	227.55%	2,074.80	521.20	262.62%	9.78%
BHEL	301.20	2.30%	253.73%	322.50	84.50	256.45%	7.07%
RVNL	417.00	10.87%	238.70%	431.80	117.05	256.26%	3.55%
BDL	1,596.00	3.62%	45.36%	1,662.95	450.00	254.67%	4.19%
MAZDOCK	4,282.10	27.52%	245.25%	4,584.00	1,230.00	248.14%	7.05%
SJVN	131.50	-5.78%	224.61%	170.50	40.25	226.71%	29.66%
DIXON	11,966.80	29.58%	174.45%	12,149.00	3,953.00	202.73%	1.52%

Data Source: NSE

No prizes for guessing; as 5 out of the top 10 stocks in terms of resilience from the lows were the PSU stocks and that is not surprising as the resilience thematically matches with 1 year returns. The PSUs with the best bounce include BHEL, RVNL, Bharat Dynamics, Mazagon Docks and SJVN. The non-PSU stocks in the top-10 list has a fairly eclectic mix of stocks from financial inclusion theme (BSE), fashion jewellery (Kalyan Jewellers), realty (Prestige), IT (Persistent), and outsourcing (Dixon Technologies). Mid-caps overall showed a lot of resilience, especially in the light of the difficult operating conditions.

Let us briefly look at the laggards in the mid-cap index; or the stocks that bounced the least from the lows of the year. There were just 2 stocks out of the 95 stocks that bounced less than 10% from the lows, while 8 stocks bounced less than 20% from the lows. The number of stocks close to the lows has reduced substantially compared to the previous month. Some of the laggards were the standard suspects like Tata Elxsi, Dalmia Bharat, Delhivery, IDFC First Bank, Syngene and Page Industries.

WHICH WERE THE MID-CAP SWING STOCKS IN FY24

The swing is the most interesting measure and looks at how close the stock price is to the 52-week highs. We have used the proximity to the 52-week high as the proxy for the swing factor. The closer the stock is to the 52-week high, the higher is the swing factor. The Mid-Cap 100 index itself is just about 0.34% short of the 52-week high; which means it has grown correspondingly with the Nifty rallying to 24,000. Out of the 95 stocks in the Nifty Mid-Cap 100 index, 27 stocks are less than 5% away from their 52-week highs, while a total of 51 stocks are less than 10% away from their 52-week high levels. The swing factor is very favourable for mid-cap stocks.

Stock Symbol	Market Price	1-Month Return	1-Year Return	52-week High	52-week Low	Bounce from Low	Distance to High
PERSISTENT	4,275.00	16.21%	-13.01%	4,285.00	1,158.59	268.98%	0.23%
GODREJPROP	3,198.00	16.30%	102.63%	3,220.00	1,495.30	113.87%	0.69%
BIOCON	351.75	8.50%	43.31%	354.90	217.50	61.72%	0.90%
FEDERALBNK	177.76	11.13%	45.11%	179.73	121.65	46.12%	1.11%
IGL	504.00	9.14%	5.99%	509.70	375.70	34.15%	1.13%
PETRONET	330.20	11.14%	49.67%	334.05	191.70	72.25%	1.17%
LICHSGFIN	797.95	23.19%	102.77%	809.90	382.70	108.51%	1.50%
DIXON	11,966.80	29.58%	174.45%	12,149.00	3,953.00	202.73%	1.52%
ASHOKLEY	241.66	9.13%	45.76%	245.67	157.55	53.39%	1.66%
OFSS	9,884.00	30.84%	157.67%	10,050.00	3,737.25	164.47%	1.68%

Data Source: NSE

What are the sectors that are showing the best swing in terms of proximity to their 52-week highs. Among the stock that are closest to their highs and having a favourable swing factor were stocks like Persistent, Godrej Properties, Biocon, Federal Bank, Indraprastha Gas, Petronet LNG etc. Typically, stocks that are closest to their highs also show positive swing and the likelihood of crossing above their 52-week highs. That is why this is a very important list for traders looking for a break out trade on the upside.

What is the story of the laggards in the Nifty in terms of proximity to the 52-week highs. The story, once again, reads like a very familiar script. At the bottom of the heap, you have stocks like Paytm, Zee, Dalmia Bharat, Yes Bank, Tata Elxsi etc Surprisingly, several PSU stocks that led in other lists don’t seem to figure in this list. That could be due to the fact that amidst the political uncertainty, it was these PSU and defence stocks that bore the brunt of the correction in the markets.

Here are some final thoughts on the mid-cap space. It is largely a sector-agnostic rally with the rallies being largely bottom-up in nature. However, there are some broad themes like defence, real estate, outsourcing and financial inclusion; that appear to be the favoured themes in the mid-cap space. We have to wait and watch what drives the mid-caps in the next Nifty journey to 25,000!