Big things come in small packages, this has come true at least for the year 2017. The S&P BSE Smallcap index rose over 40 percent so far this year compared to a little over 22 percent gain in the S&P BSE Sensex.
The S&P BSE Smallcap index hit a fresh record high of 17,245.48 and the BSE Midcap index also raced to a life high of 16,207.66 on Tuesday. The S&P BSE Sensex is now nearly 100 points away from hitting its record high of 32,699.86.
Investors who had invested in smallcap stocks at the beginning of the year could be sitting on huge pile of profits. As many as 133 stocks rose in the range of 100-1000 percent so far this year.
Smallcaps enjoyed a lot of limelight, thanks to pro-growth policies initiated by the Modi government, low-interest rates scenario, a gush of domestic liquidity from into mutual funds which have been big buyers of smallcaps, and midcap stocks.
One big reason which is fuelling optimism in smallcap is the fact that India is in big bull market and history suggests that smallcap stocks tend to do better in a bull market.
“Stocks will keep on moving higher so long as liquidity is being channelled into the financial markets. Although valuations are near the higher end and can remain alleviated so long as it is supported by earnings growth,” Jimeet Modi, Founder & CEO, Samco Securities told Moneycontrol.
“So long as the bull market continues, and we believe it has a long way to go subject to normal corrections, stocks will keep on challenging past valuation benchmarks,” he said.
But, can we call every smallcap stock as a multibagger? Smallcap stocks have turned out to be the biggest wealth creators so far in the year 2017 but not every smallcap performed well.
Investors lost money in almost 30 percent of the smallcap stocks listed in the S&P BSE Smallcap index. Stocks which eroded investors’ wealth in the year include names like Videocon Industries, JMT Auto, Lanco Infratech, Nitin Fire etc. among others.
Stocks which created wealth so far in the year include companies like Indiabulls Ventures, HEG, Graphite India, Avanti Feeds, Venky’s, Himadari Speciality Chemicals, V2 Retail, Bombay Dyeing, Gravita India, Adani Transmission, Tinplate, Rain Industries etc. among others.
Investors get attracted to smallcaps in a high growth environment. And, even though, expectations of sharp growth rebound is not expected due to demonetisation and implementation of the goods & services tax (GST), smallcap stocks will still hog the limelight.
“I had a view of policy that there would be some growth but not enough to propel the whole basket of largecaps. But, smallcaps don’t need that. Smallcaps need 3-4 percent GDP growth for a Rs100-500 crore company to go to Rs1000 crore company,” Shankar Sharma of First Global said in an interview with CNBC-TV18.
“I made a distinction long time back that forget about largecaps and smallcap is the space where one needs to go. But, interestingly after huge outperformance, I don’t think that smallcaps are in a mature bull market,” he said.
More than 70 percent of the stocks gave positive returns up to 1000 percent in the S&P BSE Smallcap index while as many as 187 stocks gave negative return up to 85 percent, according to data compiled from Capitaline.
Keeping the optimism aside investors should use the opportunity to book profits in select mid and smallcap stocks amid the continued interest, suggest analysts.
According to a poll conduct by Moneycontrol earlier in the month of October, almost 61 percent of the poll respondents feel that investors should book profits or sell 50 percent of their holding in the small and midcap space.
While the rest 22 percent feel that investors can still hold on to them as upside remains intact while 17 percent declined to comment.
“Currently, we have a cautious view on the broad market due to high valuation, slow growth in earnings than required and change in global liquidity due to the appreciation of USD,” Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.
“At the same time, we are constructively positive on India since the premium valuation of the country is likely to be maintained over the long-term as country risk are reducing. Our idea to retail investors is to be stock & sector specific to outperform the market,” he said.