Small & midcaps, which were the wealth creators in 2017, witnessed selling pressure in 2018. They have fallen up to 80 percent since August 2018 when the S&P BSE Sensex touched a record high.
Selling in some small & mid-cap stocks started in the beginning of 2018 also —thanks to high valuations, but the pressure increased further post August on a host of global as well as domestic factors.
Among the domestic factors which grappled the broader market in the past few months were — resignation of auditors in the small & mid-cap companies highlighting lack of governance, stretched valuations, absence of earnings growth; and additional surveillance measures that were introduced by the market regulator to bring down volatility.
In the S&P BSE 500 index as many as 15 stocks fell 40-77 percent since August which includes Infibeam Avenues, 8K Miles, Kwality, Dewan Housing, Central Bank of India, Bombay Dyeing, Navkar Corporation, Dish TV, Indiabulls Ventures, CG Power, Dilip Buildcon, Reliance Capital, Shankara Building Products, Jaiprakash Associates and Yes Bank.
In the S&P BSE Smallcap index, as many as 32 stocks fell 40-80 percent since August, such as Ashapura Intimates Fashion, Goenka Business, Rolta India, Bombay Dyeing, Nitco, Navkar Corporation, Dish TV, Gitanjali Gems, etc.
Should you buy?
So does it make sense to put your money in the falling stocks? Well, the answer might not be a clear ‘yes’ or a ‘no’. Yes, valuations have come down to a more reasonable level, but there are company-specific concerns which investors have to factor in while punching their buy orders.
“Our Sensex target for 2019-end is 45,000. And, at an aggregate level, we believe that largecaps offer a better risk-return profile, however, some individual stock names among small and midcaps look better, investors should stick to quality,” Vivek Ranjan Misra, Head of Fundamental Research at Karvy Stock Broking told Moneycontrol.
“I think investors are better off by a staggered buying as more volatility is expected in the near term before elections,” he said.
However, if someone is looking to build their portfolio for the next 2-3 years then this is the right time to catch the falling knife but stock selection remain the key.
A lot of stocks which have corrected significantly from their highs present a good opportunity for investors to add quality to their portfolio, suggest experts.
“Over the next 2-3 years, wealth will be created in select small and mid-cap stocks. Stocks with high weight in Sensex and Nifty will find it challenging to eke our earnings growth due to high base effect and downturn in the industry cycles they are present in,” Dipan Mehta, Director, Elixir Equities told Moneycontrol.
“Select small and mid-cap stocks will continue to deliver earnings growth and as and when macro and political uncertainties are resolved, PE multiples for these segments will again expand,” he added.