Survey: Select picks among smallcap stocks

If one compares the Sensex and the BSE Small Cap Index over the last year, the latter has outperformed the Sensex. While the Sensex logged in 47.20% gains, the Small Cap Index notched 57% gains over the period.

Analysts agree that many small caps lack liquidity, and trading in them must be done after careful research. Nonetheless, their outlook for smallcap stocks is bright. Moneycontrol asked them for their select picks feom this space.

Pradeep Chokhani, Head of Equity, Dolat Capital

Small Cap Index might surpass the Sensex

In terms of absolute numbers, the small cap index is going to outperform the Sensex in terms of absolute numbers. Its at around 5947 levels currently, which is roughly 1800 points below the Sensex. The way the sectoral index is galloping right now, I am confident that over the next 12 months it is going to surpass the Sensex.

The reason behind the small cap chase

There are a couple of reasons why investors are chasing the stocks in this sector. For one, the sector is having sharper earnings growth rate than the large cap stocks. But unless the large caps, which are the larger wheels in the system, don’t move up, the small caps can’t move up.

High pricing power

In a sustained bull phase the small caps tend to outperform the large caps because of sharper earnings growth rate. Some companises with niche products serving a niche community of consumers have high pricing power with them leading to higher margins. They are product leaders in their space and can charge more for their products. When that happens the stock prices move in tandem to the increase in profits of these companies.

Investors beware

Having said that, I would like to caution gullible investors about dud companies with dud fundamentals that also tend to participate in such a dynamic rally as we have seen in the recent past. And retail investors should be aware of such dud companies which number around 4000 out of the 5000 companies.

Chokani's others picks on next pages...