Shankar Sharma, who has made his name by finding multibaggers, believes investing in smallcap space is like identifying winners in a marathon race, and bet on those that have the highest probability to win.
“It is like a marathon,” said Sharma in a freewheeling chat at an event on June 1. “You start out with 100 or 50 runners, and then the field will spread out. You will find a bunch of guys leading the pack – five or seven runners – then clustering in the middle will be about 10 guys, and then there'll be 25 bringing up the rear.”
Sharma, who has over three decades experience in the stock markets, was referring to how runners run in a marathon race. He likened it to how smallcap companies in his portfolio perform financially.
Explaining his investment procedure, Sharma said, the idea is to eliminate those guys at the rear that are not performing and reinvest that money into the leaders and those clustering in the middle. Also, keep bringing in newer companies to join the race, he added.
The process relies on churning the portfolio actively and thus an investor needs to be on his toes to succeed in the smallcap segment. Sharma currently does not manage client’s money and rather invests his own money. Earlier, he was associated with First Global, a portfolio management services (PMS) provider.
The 60-year-old said he is not someone who has a concentrated portfolio as the risks in the smallcap are relatively higher and thus it makes sense to have a diversified portfolio.
Also read: Shankar Sharma's 4 AM strategy, Brightcom blueprint and lessons learnt from bad bets
“It (smallcap space) is not like the promised land,” said Sharma. “There will be failures and I'm cognizant of that. So I keep it fairly wide, 25 to 50 companies (in portfolio at any point in time).“
Some of the stocks that Sharma currently holds are Droneacharya Aerial Innovations, Brightcom Group, and Priti International, among others.
A few of his investments have received criticism as well, especially Brightcom Group where concerns regarding corporate governance have emerged. Though, Sharma has been insistent that those are non-issues.
Similar to Mark Mobius, Sharma also believes the banking sector is the most overrated one in India and “not a sector where (he) wants to put (his) money.” Banking stocks have the largest weight in headline indices and are recommended by most of the analysts.
Smallcap valuation not demanding
Sharma opines that the valuation is not an issue in the smallcap segment and one can easily find decent-sized companies that are trading at mid-teen valuations.
“This bucket is crazily undervalued,” said Sharma who is impressed by the entrepreneurial energy shown by promoters of smaller companies.
Currently, Nifty Smallcap 100, a representative index of smallcap companies, trades at 18.9 times the earnings. This is in line with MSCI World Smallcap Index that trades at about 19 times. In comparison, Nifty trades at 21.5 times the earnings.
In the last one year, Nifty Smallcap 100 is up 11 percent. In comparison, Nifty Midcap 100 is up 19 percent and Nifty about 12 percent. This signals an underperformance from the smallcap segment and also an opportunity as they have a lot of catchup to do.
“A number of companies out there with fantastic business models. Now promoters are improving their governance or are being forced to improve their governance by more stringent laws. Whatever the reason, the end result is better transparency and valuations are still not demanding,” said Sharma.
The celebrated investor disagreed with those that said it was easier for those that were born in the 1960s as they had the opportunity to buy equities when the Indian market was very small and thus resulted in outsized returns. He believes the best opportunity is right now.
“Today, it's probably the best time in the history of modern India when you should be out there investing,” he said.
Update: In an earlier version, this article mentioned names of companies held by Sharma based on data from Trendlyne. After a clarification from Sharma, we have made the required changes. The error is regretted.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
