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Use Bouts Of Volatility To Pick Mid-Cap Stocks, Says Samit Vartak

Here’s why SageOne Investment’s Samit Vartak thinks it’s a good time to find value stocks among mid caps.

Modi Claims Victory In India As BJP Sweeps ElectionPeople look toward a screen and an electronic ticker board outside the Bombay Stock Exchange (BSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Modi Claims Victory In India As BJP Sweeps ElectionPeople look toward a screen and an electronic ticker board outside the Bombay Stock Exchange (BSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Volatility caused by movement of institutional money will lead to periods of extreme valuations—both high and low—in small and mid caps and that can be used to pick stocks, according to Samit Vartak, founder and chief investment officer at SageOne Investment Advisors LLP.

The Securities Exchange Board of India’s regulation on re-categorisation of stocks for mutual funds has led to increased volatility in the non-large cap stocks, Vartak, who oversees assets worth Rs 1,000 crore, said in a note to investors. “I have observed stocks falling 30-40 percent simply because a fund holding 3-4 percent decided to exit the stock. In effect, one fund manager’s decision to exit sentimentally forced many weak investors to exit for no fundamental reasons of their own.” This, he said, has been fuelled by instant dissemination of news, data and analysis through social media, making investors quickly pull the buy or sell trigger.

Investors tend to be late to the party as they feel that the safest time to invest is when everyone around them is also invested/investing in the same asset class. In reality, the safer one feels the riskier is the time to start investing.
Samit Vartak, Founder, SageOne Investment Advisors LLP.

Around 55 percent of India’s institutional holding lies in the top 20 stocks while only 1 percent of their money lies in the bottom 1,000 of the top 1,500 stocks, the note showed citing Ace Equity. This skewed investment has an exaggerated effect on the stock price movement triggered by an institution selling their holding, it said.

Use Bouts Of Volatility To Pick Mid-Cap Stocks, Says Samit Vartak

“The value of institutional holding in the bottom 1,250 stocks fell to Rs 2.9 lakh crore in June 2019, compared with Rs 4.7 lakh crore in December 2018 while their net selling was less than Rs 12,000 crore,” Vartak said, adding that this indicates a 15-fold impact. “Given the current holding, even if 1-2 percent from the top 20 institutional holdings were to move back to the small caps, the impact cost would be very high.”

India’s S&P BSE MidCap Index has fallen 7.39 percent over last two months while the S&P BSE LargeCap Index has risen 5.9 percent. In comparison, the S&P BSE Sensex has risen 11.4 percent during the same period.

Making a case for investing in non-large caps, Vartak said despite it being a difficult time to build portfolios, there’s an opportunity to pick businesses that have differentiated themselves against the competition and have emerged stronger after a tough cycle. “You get these great businesses at reasonable valuations and if the economy picks up, they will do exceedingly well,” he said. “Today you're able to get reasonable to cheap valuations in high-quality businesses if you look away from the top 20 stocks and popular consumer stocks that dominate the major indices.”