Saturday, January 8, 2011

Investing in Mid Caps .

Small and mid caps companies looks very attractive at times on stock indices. You might find them rightly priced, far cheaper than the regular blue chips but investing in them is a tough question.

The biggest problem in these companies is lack of transparency. Inspite of strict discloser norms enforced by SEBI, there are companies which frequently cook up their numbers.


The corporate governance issues are creating lot of volatility in the mid caps stocks off late.The mid caps actually corrected by nearly 25% in last one month as some of the companies were found to be either involved in unethical business practices or their owners were involved in some types of scams which puts a question mark on the whole company.  



Mid caps also have problem of cash and seldom a recession can eat of all their cash reserves and a company might never be able to become profitable even after the return of good times . In case of blue chips the resilience to survive a few quarter of negative growth is much more.
I believe the best way to pick a good mid cap stock is :
1.      
      How to pick the real Infosys of the future amongst hundreds of scripts? The real multi-baggers will be found in mid or small caps only . 

            1. Analyze the leverage of the company: A highly leverage medium sized company is more likely to fall in bad times.
2.      
      2.Disclosures and Transparency
3.      3.Quality of management
4.      4.Business Model
5.      5.Barriers to Entry in the business
6.      6.Profit margins 

             
        All said and done , its a tricky exercise . If one is not very sure of investing in equities than investing in mid caps is definitely not a option . 

1 comment:

Aarav Sharma said...

This site is excellent and so is how the subject matter was explained. I also like some of the comments too.Waiting for next post.
Investing stocks