Small/Mid-Cap Stocks With Significant Upside Potential

JC Parets
August 10, 2020

In June we outlined a thesis for the Mid and Small-Cap segment of the market to begin outperforming in a meaningful way. In that post, we outlined a number of stocks we were buying to take advantage of that theme, but many are well on their way to their upside objectives already.

Today we want to follow up on that theme, show why it's still intact, and outline stocks with an attractive reward/risk at current levels.

We've written extensively about what the Large-Cap/Small-Cap ratio means and how we interpret it. If you haven't read them, I'd highly recommend checking them out before continuing with this post (June 9th post and June 19th post)

But, to sum it up the idea here is that Small-Cap outperformance is associated with a Bull Market in Indian Equities because it signifies risk appetite among market participants and a broad-based market rally that has sufficient participation from sectors/industry groups.

And so far we've been right, with the Nifty 50/Small-Cap 100 ratio falling about 10% since then...signaling Small-Cap outperformance. Our thesis remains intact as long as prices of this ratio are below 2.30, which they have been for the last two months.

Click on chart to enlarge view.

Here's another perspective on that same chart, overlaying it with the Nifty 500. We believe the March low in the Nifty 500 and March high in the ratio were a major inflection point and continue to suggest we're in a new bull market for stocks.

Now, let's review the factors we used to identify long opportunities when this thesis began in June. Here's an excerpt from that post:

"Our favorite way to identify stocks that foot this bill is by looking for trend reversals sparked by a failed breakdown and bullish momentum divergence. We’re constantly discussing setups like this, but the main characteristics we want to highlight are these.

  1. The stock reaches a long-term support level;
  2. Momentum is diverging positively; and
  3. A failed breakdown sparks the rally and allows us to define our risk. "

And here's the setup in Bharat Electronics we shared then and how it's fared since.

The stock has gained about 40% since this setup emerged, so today we're going to look for stocks that are currently exhibiting similar conditions.

One of the new names on our list is Lakshmi Machine Works, which is breaking above 2,850 and confirming a failed breakdown and bullish momentum divergence. As long as prices are above 2,850, then these conditions remain intact and we can look for upside towards 5,400 over the coming months and quarters.

Other stocks like Emami Ltd. only have 2 of the 3 conditions present but are still worth a look on the long side since money continues to rotate into laggards. Our risk is so well-defined in these types of setups, we're willing to overlook the lack of a momentum divergence and give them a shot.

The stock confirmed a failed breakdown below support at 255 but does not have momentum diverging positively. If prices are above that level, the bias is higher towards 460 over the coming months and quarters.

Any short-term weakness in either of these stocks should be viewed as a buying opportunity since they've successfully confirmed long-term bearish to bullish trend reversals. Given these are weekly charts, we're less concerned about what they do tomorrow or this week and more with how they develop over the next few months and quarters.

We can be long Asahi India Glass Ltd. if prices are above 165, with a target of 415.

We want to be buying a breakout above 1,800 in Sundaram Clayton. Once prices are above that level, we can use 1,700 as our risk management level and look for upside targets of 3,035 and 4,285.

Any weakness back towards 140 in Advanced Enzyme Technologies can be bought, with a target near 445.

Heritage Foods Ltd. is a long if prices are above 290, with a target near 630.

Time Technoplast is a name we've been long and can stay so if prices are above 33, with a target near 105.

We can buy a breakout above 54 in Indiabulls Integrated Services and then use 48 as our risk management level. Our initial target is up towards 250.

Any weakness towards 140 in Gujarat Narmada Valley can be bought, with a target near 270.

Sobha Ltd. is a long if prices are above 208, with a target near 400.

Blue Star Co. can be bought on a breakout above 550. At that point, we can use 525 as our risk management level, with a target back at 825.

We're still waiting patiently for a breakout above 140 in Centuryply. If we get it, we want to be long with a target near 260.

Care Ratings Ltd. is a long if it can break out above 450, with a 670 target.

Wockhardt Ltd. weakness can be bought towards 230, with a target 575 target.

A breakout above 51.50 in NLC India Ltd. can be bought, with a 115 target.

Phoenix Mills remains a long if above 530, with a target of 900.

Sterlite Technologies can be bought on this weakness as long as prices stay above 105, with a target near 265.

Indian Hotels Ltd. is a long if prices are above 75, with a target near 125.

We can be long Steel Authority of India if above 28.75, with a target near 70.

This is a Large-Cap stock, but continues to work well. As long as prices are above 78 in NMDC Ltd., we can be long with a target near 135.

As you can see, these are all weekly charts so we're looking out months and quarters as opposed to days and weeks. If our view that stocks are in a new bull market is correct, then Small and Mid-Caps should continue to outperform and these stocks should benefit greatly.

As a result, any near-term weakness should be viewed as a buying opportunity as long as prices stay above their risk management levels.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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