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Saturday, December 29, 2012

Saral Gyan - Value Picks

As most wealth building investors know, investing in the stock market is often divided into large-cap, mid-cap and small-cap investing. Each style of investing being based on the size of the market capitalization of the companies being invested in.

This methodology of dividing up companies by market size has become so well established that most mutual funds get classified on the basis of the size of companies they invest in. Thus, while large cap companies refer to some of the largest, most well-known companies in the country, and small-cap companies often represent little known firms. Mid-cap companies encompass the entire range between these two extremes.

But is mid-cap investing a true road to wealth, and worth a look by the wealth building investor?

Proponents of mid-cap stock investing frequently point to the relative stability offered by firms in this range while still retaining plenty of their upside potential. Large firms on the other hand have a tough time increasing shareholder value owing to their sheer size, and small companies are significantly more risky.

We frequently refer to Warren Buffett's method of evaluating a company based on their fundamentals. Specifically, he asks us to look for companies that: 
  • Are in a business that you can truly understand
  • Have a large competitive advantage (huge moat) over existing and new entrants to the business
  • Provide a service that is likely to be needed for a long time, and is unlikely to be replaced any time soon.
However, even companies with the above qualities may never grow to be a large-cap company simply because the management may choose to not grow the firm too quickly. In such a situation, one has to make sure that much of the profits being made are distributed as dividends to all the stakeholders, including shareholders.

The other factor to look for is the overall management of the firm and if they are revealing enough information about the company to its stakeholders, or are they being secretive about its market position. Any sign of stonewalling or misdirection from the management is a good reason to jump ship.

Given the above set of factors, and a company that is selling at a reasonable valuation, a mid-cap stock can indeed yield double-digit growth for many years to come. However, such companies are hard to find - since the moment Dalal Street discovers such a company, it will bid up its value to sky high levels rather quickly. However, such value picks do exist and can be found through careful evaluation.

But a blind investment into mid-cap stock companies is likely to lead to below market performance. Mid-cap companies often have not shown how they would behave in the face of increased competition, in economically tough environments, or when their core product or service is in danger of being replaced or superceded.

At Saral Gyan, equity analyst team keep on evaluating various companies of different sectors in mid cap space to find out such Value Picks. Equity analysts consider those companies as mid cap stocks whose market capital is in the range of 1000 crore (10 billion) to 10,000 crore (100 billion).

Mid Cap stocks should be a part of your investment portfolio with long term perspective to create wealth. Its advisable to have equity portfolio allocation between 20 to 40 percent in mid cap stocks that offers true value on your investments. You can subscribe to Saral Gyan - Value Picks (mid cap stock research reports) to grow your portfolio by investing in strong mid cap companies. 

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