Five mid and small-cap stocks trading at a deep discount right now

The correction in the mid and small-cap segments, with stocks falling by 15-20% from the recent highs, offers a good buying opportunity. Here are five stocks that have seen a sharp decline in valuation despite robust financials   

Karan Deo Sharma
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Five mid and small-cap stocks trading at a deep discount right now

“The time to buy (stocks) is when there’s blood in the streets,” said British financier Nathan Rothschild about 200 years back. In other words, investors make serious money in equities when pessimism is high and stock prices and valuations are low and continue to look down.

There’s no blood on Dalal Street as yet with the benchmark BSE Sensex and NSE Nifty 50 indices steady for the last three months and their valuations at a three-year high. However, the benchmark indices track the health of large-cap stocks. 

The mid and small-cap stocks have however come under valuation pressure after a year of phenomenal rally.

For example, the BSE Small Cap index is still down 5 percent during March so far despite a strong rebound in the share price of some of the top stocks in these indices. Similarly, the BSE Mid Cap index is down nearly 1 percent month to date despite recent gains. In contrast, the benchmark BSE Sensex is up around 1 percent month to date in March so far.

The indices however do not tell the full story. Many mid and small-cap stocks are still down 15-20 percent from their 52-week highs despite a recovery in the broader indices. This is a perfect opportunity for long-term investors to pick quality mid and small stocks at reasonable valuations.

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According to the legendary equity investor Warren Buffet, equity investing is simple but not easy. The investor just needs to track the changes in a listed company’s key financial and valuation ratios. And if the current valuations are very low relative to the company’s growth potential and its financial ratios then they should buy the stock and hold it for a while. 

As a general rule, a stock becomes a screaming buy if its equity valuation ratio such as price-to-earnings multiple and price-to-book value has become very low compared to its return on equity (RoE) or net worth (RoNW).

Here are five mid and small-cap stocks that have seen some of the sharpest falls in their P/E multiple and P/B ratio despite reporting high RoE and having a strong balance sheet.

1. J K Paper

One of the country's top writing and packing paper companies has seen a sharp fall in its share price and valuation ratio in recent weeks. The stock is currently trading at a trailing price to earnings multiple of 5X, compared to its 3-year average RoE of 21 percent. Its price-to-book value of 1.2X is also very low and less than a third of Sensex's current P/B ratio of 3.7X. Its current debt-to-equity ratio of 0.55X is also low compared to other paper companies and its historical average. All this makes it a value stock at the current share price.

2. Mangalore Refinery and Petrochemicals Ltd (MRPL)

The ONGC-owned crude oil refiner is now one of the cheapest oil & gas stocks relative to its recent financial performance and improvement in its profitability and return on equity. The stock is currently trading at a P/E multiple of around 9X compared to its three-year average return on equity of around 39 percent. Its price-to-book value at 3.2X is also lower than that of the Sensex. The company’s debt-to-equity ratio at 1.2X is on the higher side, but the total debt on its books is down by nearly 45 per cent in the last three years signalling a sustained improvement in its balance sheet strength.

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3. Great Eastern Shipping Company

The Mumbai-based GE Shipping is one of the cheapest stocks in the mid and small-cap space. At its current share price, the stock is trading at a P/E multiple of 5.9X, a deep discount to Sensex's current P/E of 25X. Similarly, its current price-to-book value ratio of 1.3X is around a third of the broader market valuation. In comparison, the company RoE has been 19.3 percent on average in the last three years. GE Shipping is a debt-free company on a net basis and sits on cash reserves of around Rs 4700 crore, equivalent to nearly a third of its current market capitalisation of Rs 14,200 crore.

4. Ujjivan Small Finance Bank

The Delhi-based Ujjivan Small Finance Bank is now one of the cheapest stocks in the segment after the recent fall in its share price. The stock currently trades at a P/E multiple of 7X while its price-to-book value of 1.9X is also low compared to other small finance banks and nearly half that of large private sector banks. In comparison, its RoE has been 20 percent on average in the last three years along with high double-digit growth in its gross interest income and net profits.

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5. Mannapuram Finance

The Kerala-based gold loan provider Manappuram Finance is one of the cheapest stocks in its industry. At its current share price, the stock is trading at a P/E multiple of 9.5X which is low compared to its three-year average RoE of 26 percent - amongst the best in its peer group. Its price-to-book value ratio at 1.5X is also on the lower side and amongst the lowest in the large non-banking finance companies. Low valuation coupled with rising gold prices makes it a value stock in the current environment.

Happy Investing!

(Disclaimer: This article is for information purposes only. Readers are advised to consult a certified financial advisor before making an investment in any of the funds or securities mentioned above.)

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist). 

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