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Why Small-cap Stocks Will Outperform Bluechips

Jun 17, 2019

Richa Agarwal, Research analyst

It can be frustrating to see the BSE Sensex make all-time highs, while the BSE Smallcap index hasn't made any meaningful moves.

Despite that I am quite excited about small-cap stocks right now.

Why?

I believe, as an economic recovery is on the anvil. The skeptical ones among you would argue that smallcaps have wiped out your hard-earned gains. Some of you may be thinking its best to stay away from them.

I beg to differ.

I agree that many of smallcap stocks are down more than 50% from their peaks.

But many of those had no business being valued that high in the first place.

Besides, the negative sentiment around smallcaps has also brought down excellent businesses down to never-before seen valuations!

Money has flown from the small caps to the large caps. This has pushed up the Sensex to new highs and left small caps high and dry.

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So while you may have felt the pinch in the short-term, I believe buying the right small caps now can be a massive wealth creating opportunity for the long run.

Why am I so convinced about this?

Apart from signs of a full-blown economic recovery, this phase has happened before.

And small caps have always bounced back.

You see, smallcap stocks don't enjoy the same amount of media and analyst coverage as their larger peers do. So there exists a lot of misinformation about them.

This adds to the volatility of these already illiquid stocks as panic and misinformation can spread quickly.

This means that negative sentiment in the space affects even the quality businesses. As bad stocks go down, good stocks go down with them too.

But the difference is the quality stocks come back up stronger.

Have a look at these charts.

Smallcaps Recovered Sharply After a 30% Crash


The smallcap index had fallen by over 30% in just nine months from its peak.

The panic also bought down the choicest of smallcaps at mouthwatering valuations. Once the panic subsided, the index went up over 120% in just one year.


Coming back to the current situation, the smallcap index is down about 27% from its peak made in January 2018.

The liquidity crisis in NBFCs, the DHFL, and IL&FS fiascos has taken the steam out of smallcaps. Fear and misinformation reigns supreme. Quality businesses are back to cheap valuations.

Of course, the future need not necessarily mirror the past but I just want to drive home a simple point, dear reader.

This is not the first time smallcaps have fallen out of favour and then gone on to recover smartly

It certainly won't be the last time this happens either.

Reading all this about small-cap stocks being on the verge of a turnaround might have bought some questions on your mind.

How can I identify quality small caps?

How much should I invest?

How long should I hold on to it after buying?

What about the risks?

But the good news is that I do this for a living and you don't have to do the heavy lifting.

I recommend the best small-cap stocks in Hidden Treasure.

Since its launch 10 years ago, Hidden Treasure has beaten the Sensex 2.5 times.

Page Industries, eClerx Services, NIIT Technologies, Balkrishna Industries, City Union Bank, Indoco Remedies, PI Industries, Astral Polytechnic, Vinati Organics... these are just some of the big winners!

I believe this is a great time to buy the high quality smallcaps that have been beaten down.

No one is talking about smallcaps these days and that is exactly why they are the best place for your money right now.

Warren Buffet's classic maxim comes to mind...

  • "Be fearful when others are greedy and greedy when others are fearful."

With all the fear surrounding smallcaps, I believe now is the time to be greedy, and buy high-quality small-cap stocks, which are down simply because of this fear in the market.

But that doesn't mean you should get carried away by greed.

I'm not saying the small-cap carnage is over. No one can predict that. Anyone saying so, is merely speculating.

What I can say with confidence from all my experience is that high-quality smallcaps will not only survive but thrive in the long-term.

If a company's fundamentals and rationale to buy are intact, it simply makes sense to buy the stock... or hold on to it if you have already bought.

In such a situation, a crash only adds to the margin of safety. You could buy more and maximise your potential return while minimising risk.

So, now is not the time to shy away from smallcaps, dear reader.

The Indian stock market has great opportunities in this space right now. Pick out the best smallcaps at the dirt-cheap valuations they are available now, and sit tight for the long-term.

Do not let the negative sentiment overwhelm you. Focus on the fundamentals, and buy the stocks where quality meets value.

If you want to know which ones you can add to your portfolio right away, follow my recommendations.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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