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Stocks

Market Scramble: Midcap growth stocks take center stage

TOKYO -- In a directionless Japanese stock market, foreign investors are passing over blue chips in favor of midtier companies that are less sensitive to exchange rate swings and expected to enjoy steady growth.

The Nikkei Stock Average snapped a winning streak Wednesday with its first drop in six trading days. Even as the benchmark index's decline reached 300 points in the afternoon amid a sharp rise by the yen, some stocks bucked the trend.

Hisamitsu Pharmaceutical extended its gains for a fifth trading day, reaching a post-listing high of 6,000 yen ($54.90). The company expects a third straight year of operating profit growth in the fiscal year ending February 2017 on rising sales of its Salonpas anti-inflammatory pain reliever to tourists. Purchases by inbound travelers are shifting from big-ticket items to cosmetics and over-the-counter drugs.

The stock has attracted buyers on expectations of continued growth, said Masayuki Kubota of the Rakuten Securities Economic Research Institute.

Meanwhile, larger peer Takeda Pharmaceutical slumped to a year-to-date low. It ended Wednesday at 4,675 yen, down 20% from a January peak. Investors attracted to its high dividend yield had gravitated to Takeda, a prominent stock in a pharmaceutical sector relatively insulated from economic shocks, as uncertainty over the external environment mounted.

But Takeda has gradually fallen out of favor of late. Investment metrics show it as overvalued, and some investors consider it a mature company with limited room for growth.

Pharmaceuticals are not the only sector where midsize businesses are outperforming larger counterparts. Meat wholesaler and processor S Foods hit a record high Wednesday even as NH Foods slid 3%. S Foods, which had focused on beef, has also made headway in the pork market. It projects growth in both sales and profit this fiscal year. The company can pass on exchange rate fluctuations in wholesale prices, reducing downside risk, said Shoichi Arisawa of IwaiCosmo Securities.

This market centering on midtier companies' results has legs, said Tadao Kimura of Sumitomo Mitsui Asset Management. Analysts and fund managers provide research on businesses after earnings releases. Unlike with large enterprises, where multiple analysts fight over the same turf, coverage of midsize businesses often comes out late. It also generally takes longer for analysis, in the form of client reports, to be priced into a midcap stock.

Growing speculation over a U.S. interest rate hike has made it more difficult to invest in blue chips vulnerable to shifts in exchange rates and external demand. Recent disclosed investments by foreign players include midsize companies with strong businesses, such as Topcon. Some European pension money is flowing into funds investing in small- and midcap growth stocks, said Chisato Haganuma of Mitsubishi UFJ Morgan Stanley Securities.

Market players may also be following the lead of more discerning investors and seeking opportunities to buy into midcap growth stocks that tend to be forgotten.

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