How to Find Potential Midcaps Before They Turn into Large caps

Adding midcaps to your portfolio can not just provide a higher growth prospect than large caps but also give a higher stability than small caps. Hence I find this space to be a sweet spot for long-term investing.

Now, how can you select potential outperforming stocks? I explained this in my 13 September 2023 webinar and the same is demonstrated below to help you get a hang of it.

The first tool we will be using is the ‘Screener’ which is there in the left pane of InvestingPro+. The filters we need to put in to get a list of such stocks are:

1. To select the universe of midcaps, we are taking a market capitalization between $3 - $7 billion.

2. The stocks should show at least a 15% growth (CAGR) in revenue over the last 3 years.

3. The bottom line is also important. We also require EPS (which adjusts net profit with equity dilution (if any)) to grow by at least 12% (3-year CAGR).

4. Lastly, to keep a check on valuations, we have filtered the stocks based on P/E

This is just a framework for selecting good-quality midcaps. Investors can play around with 100s of metrics to customize their own filter.

Now you would be getting a lot of stocks that fulfill your parameters but obviously, they will be more than you can buy. So to further narrow down the list, we need to see which stocks among them are trading at the steepest discount to their fair value.

For this, go the the ‘Fair Value’ column and the probable upside potential of the stock will be clearly mentioned in the corresponding row. For eg, in our search results, OIL India and Jindal Stainless (NS: JIST ) have come up that have the potential to rally 38.5% and 28.9%, respectively, before they reach their fair value.

But what actually is fair value and how is it calculated?

When doing fundamental analysis, there comes a concept of intrinsic value (fair value) which simply means what is the actual valuation of the company which helps determine whether the stock is undervalued, at par, or overvalued.

There are multiple models that can calculate intrinsic value but all of them are quite complex and require a strong skillset in financial modeling. Even after the appropriate modeling, the chances of error could be there as some assumptions taken can go wrong, or due to some human error, etc.

InvestingPro+ uses multiple models in the background to arrive at the intrinsic value as per each model. To further round off the result, it takes the average of all intrinsic values (called fair value) and hence the valuation is more accurate and lesser prone to the drawbacks of any single model.

If you look at the profile page of OIL India on InvestingPro+, you will see that the stock has the potential to rally 38.5% (to INR 387.4) from the CMP of INR 279.7. This fair value has been calculated by taking into consideration, 10 complex financial models and the average of their respective values.

This fair value gets updated after every quarterly result and therefore keeps investors updated w.r.t. the latest intrinsic value. Once the CMP reaches the fair value or the fair value drops till the CMP, investors can think of booking their position.

Currently, there is a 65% once-in-a-lifetime discount running on InvestingPro+ which will last till 30 September 2023. Those looking to take advantage of it can click here and use the coupon code PROW629 to avail their discount. Alternatively, you can also scan the QR code given below. To watch the recording of the webinar for free, click here.

In case you want to connect with me or have any queries, reach out on Twitter. My handle is - aayushxkhanna. You can mail me as well at - aayush.k@investing.com

Note: The security mentioned above is not a recommendation but just an illustration of how to build a portfolio for the long term and when to book your positions.