Market cap: Does it matter?

It is a common opinion among investors that large market capitalisation stocks are well researched and therefore, to generate above-average returns, there is a need to look at mid-caps.

While the criteria for categorising large-cap stock and mid-cap stocks is not standardised, it is safe to assume that there is a fascination for 'mid-caps'.

In this article, we attempt to highlight the performance of the BSE Sensex stocks into two sets i.e. top gainers and top losers over the last six months and eventually, driving home the point that there is 'story' in the large-caps as well.

First, a brief performance of the BSE Sensex is of significance. Though this benchmark index has declined by 2.2% in the last six months, in the last one month, it has moved up by as much as 10.0%.

One of the key reasons attributed to the same is that 'FIIs are buying.' More importantly, the BSE-200 index, which is much broader than the Sensex, has declined by 2.4%!

Having looked at the broader index level performance over the last six months, if one were to consider the stocks in the Sensex, 14 stocks have outperformed the market. At the same time, 16 stocks have under-performed. The table below highlights the key gainers and losers over the same period.

As is evident from the gainers list, software stocks have been in the reckoning. Of the top five gainers, three are software stocks! While there is only one pharma stock among the gainers list, barring Dr. Reddy's, most have gained.

Buoyancy in demand and expectations of better pricing environment resulted in cement stocks gaining ground.

On the loser's side, while HPCL witnessed selling pressure due to unfavorable government policies on the pricing of petroleum products, SBI lost on account of poor 1QFY05 results. The hardening of bond yields affected the other income of SBI.

The key reason for the sharp fall in the stock price of Maruti could be attributed to 'unreasonable' growth expectations. HLL was dumped by investors post the price war with P&G. The premium valuations that HLL used to enjoy are slowly declining.

Now comes the critical question? Are large-caps well understood and therefore, offer relatively lower chance of providing adequate returns to investors?

We do not think so. Assuming that an investor invested in one stock from the top five gainers before six months, the return is as high as 25%! While it is easy to compare and analyse performance in retrospective manner, the point we are trying to make is that it is not necessary that index stocks will continue to under-perform the smaller and under-researched stocks over the long-term.

At the same time, stocks like Infosys, HDFC, HDFC Bank, Asian Paints, Tata Power, Ranbaxy and ITC were once 'mid-caps'. There are positives and risks associated with mid-caps as well.

At the end of the day, be it a large-cap or a small-cap, it is important for investors to research the company well and align their investment horizon with the management's long-term outlook of the business to make reasonable returns.

There is no point in investing in companies like Ranbaxy and Dr Reddy's with a six-month horizon when the management is moving the company towards its 2012 objective.

It is the stock pickers' market and there is no point in blaming the stock market for one's losses every time!

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