Midcap Madness: Stocks That Look Just Too Cheap

10th May '23 by Mark Simpson

13 comments 5879 reads

In my last article, I looked at what investors can learn from the study of 64,000 global stocks. The key finding was that as the investment time horizon lengthens, stock market returns come from fewer and fewer stocks. It is incredibly hard to pick the big winners over the next five years, let alone the next 30 years. This is why I prefer to take advantage of shorter-term market inefficiencies available over a one-to-three-year time horizon. These are the kind of opportunities that the Stockopedia StockRanks seek to exploit.

For this screen, I am looking to take advantage of those inefficiencies by searching for mid-cap stocks that are too cheap. Investors have to be careful buying into something looking superficially undervalued. Markets are often quite efficient at pricing more liquid stocks. Hence many investors prefer to focus on the less-researched small cap markets. However, I believe opportunities may also lie in mid-cap companies in the current markets.

Why midcaps?

I believe there is a reason that some mid-caps may be currently undervalued, and it is to do with retail fund flows. The following is a graph of retail fund flows into Equity funds over the last eight quarters from The Investment Association:

Equity funds have been facing significant outflows since the start of 2022. This means that equity funds need to meet these redemptions by selling stocks. As a result, funds will typically sell their most liquid stocks first. Conversely, the effect of a particular fund selling will likely have a more significant impact on the smallest companies. So the idiosyncratic effect of a specific company becoming oversold is greater in the midcaps.

Why now?

Going back to the Investment Association Data, they also publish monthly statistics. Here is the graph of monthly retail fund flows to equity funds over the last year:

The trend has been improving since the nadir in September last year, and In March of this year, fund flows became positive again. Although the amount was small and there is no guarantee that they remain positive in the future, the selling pressure on midcap companies will have at least diminished in the short term. If the trend continues, funds will start to deploy capital back into the most undervalued shares. On…

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FREng

10th May '23

Thanks, Mark. That's a useful screen to use as the basis for further research.

Investingnewbie

Thanks, Mark. This ticks the box for some further research and possible investments.

G Morris

Miners mentioned look interesting with their big yeilds and as long as World economy dosn't slow down too much. Uk focused companies seem stuck in a proper rut at moment with profits been taken on any rises for many shares, computer trading possibly. Screen does throw up what seems like bargains and thank you for the smaller list of suggestions.

WarrantStar

Thanks for this Mark. It's good to see some analysis of companies which are larger than the SCVR deals with. Also very interesting to follow the link to the Investment association. I will consider how I can best use this market information to guide my decisions on when to buy/hold/sell .

Derbion

Thanks, Mark. Yet another insightful article giving people something to ponder.

Helvellyn

That's a very helpful piece Mark, thank you.

I am currently looking at PayPoint (LON:PAY) and Wickes (LON:WIX) so you couldn't have times it better. I see you hold those 2 . There are others there that might be of interest too. I have held Central Asia Metals (LON:CAML) for some time and recently bought back in to Redde Northgate (LON:REDD) around the current price after getting out at 410 and 435 earlier in the year and then having FOMO.

ken mitchell

Fabulous article Mark. As my investment focus is largely oversold big dividend paying shares and Investment Trusts it’s right up my street, so many thanks. I hold a few of them and several others on the watch list. Cairn Homes (LON:CRN) looks especially interesting. I’ll be referencing your article regularly.

WDWombat

The downard volatility (i.e. more pronounced price falls) in smaller caps has been really clear since the market started to account for inflation and rate changes from (very roughly I think) September 2021. So Aim stocks (overall and as simplistically measured by their index) have been the worst followed by mid-caps; the best group has clearly been larger caps. This is largely a pheonomenon of the higher risk profiles and less predictable earnings and sometimes weaker balance sheets of smaller companies at a time of acute macro uncertainty. When the market does finally turn this should reverse as risk appetite returns.

These stocks all, I think, look cheap but I would never assume that analyst consensus beyond twelve months is more than a stab in the dark. So when looking at smaller stocks do look at probable cash flows and financial resources. It is also often worth checking that Stocko have the figures right. They usually do, but not always. EV is market cap plus net debt or less net cash. TCap is shown in it's Stockreport as having cash of £2.9bn and net cash of £1.8bn. I reckon, from their published figures, they had (at Dec 2022) net cash of £277mn and so an EV of around £1.1bn not the big minus figure shown. If I could buy a decent business and be given £500mn as a gift for doing so I would jolly well do it if I could.

I suppose I am saying screens are great, and this is an excellent one, but I like to get to know the business a bit.

KevinS1

Thanks Mark. Great article, but I am probably biased as I already own 7 of them.

It does give me confidence though to know I am on the right track, and TBH the majority of them seem to have hit a point where their SP has stabilised and are trading in a range. I am hoping waiting for some better news on the macro picture before starting their rerating.

In fact I am considering topping up some of them to full-holdings, but am unsure if I would be better off awaiting the start of the recovery first, but risk missing out on the first stage........choices.....choices.

A really useful screen I will add to my other ones.

davidallen77

11th May '23

Great screen Mark many thanks lots of possible take over takes there for PE i expect.

MontanaDawn

Thanks Mark, very interesting read.

AlexB1966

Great article. A rich seam of quality companies at very reasonable prices. I guess some are vulnerable in a recession but that is looking further down the line. Already have several on the radar so this is positive reinforcement!

The Ox 2906

Very helpful and useful article thanks Mark. Sadly National Express has ruled itself out as uninvestable due to the silly name change investment criterion. Now to be known as Mobico!

Midcap Madness: Stocks that look just too cheap

Why midcaps?

Why now?

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Mark Simpson

13 comments

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