A High Growth High Quality Small Cap Stock to Buy Now - The 5 Minute WrapUp by Equitymaster
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A High Growth High Quality Small Cap Stock to Buy Now

Oct 16, 2018

Editor's Note: In the recent market correction, many high quality small cap stocks have fallen more than they should have. Some of them are offering huge upside from these levels. Today, I'm sharing with you one such opportunity. Here's Richa Agarwal, Equitymaster's small cap expert and editor of Hidden Treasure with more...


Richa Agarwal, Research analyst

Confidence comes back one at a time, but fear is instantaneous...

Fear just spreads like nothing you've ever seen...

That's the advantage I've got, frankly. It isn't IQ. It's that I'm not going to get fearful about the United States over time.

Says Warren Buffett.

And in saying so, captures perfectly what's happening in the Indian markets now.

If you're having trouble keeping up, this is basically what happened:

IL&FS defaulted...

DSP mutual fund sold Dewan Housing Bonds at a discount to increase its cash, in anticipation of tightening liquidity.

Markets made a weird correlation between IL&FS and Dewan's prospects.

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And Lo! The stock of Dewan Housing crashed by 61%.

The plunge was despite the cash surplus and no default at Dewan Housing. It did not take long for the stock to rise 62% from those lows.

Imagine, if you understood how clueless the markets in the short term can be, you could have possibly made over 60% gain in just two trading sessions.

Don't worry. It's not too late.

The markets are still clueless.

You see, a lot of good NBFC stocks have been caught up in the correction triggered by these events...and in my view, unfairly. That's because IL&FS's exposure to India's debt and bank loan market is not significant.

What has happened at IL&FS does not affect the long-term prospects of well managed companies in the financial sector.

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It has only brought some good finance firms in a very attractive buy zone.

And if you can find the right firm, you will find yourself with a stock that could make your portfolio.

One of these is a stock I recently recommended in Hidden Treasure.

When I first recommended the stock my view on the stock at the time was that it was a bit expensive so Buy only 50% and wait for a correction for 100% exposure.

When Others are Fearful... it is Time to Get Greedy

That correction is now.

With 43% correction since recommendation, thanks to the recent mayhem, I have a 100% buy view on the stock now.

And I believe that at these levels, it could be a perfect wealth building chance for those who believe in long term investing and do not get swayed by market's moods.

The last time I made a contrarian bet in the financial service sector was at the time of demonetisation.

At the peak of negative sentiments in the financial sector, I had recommended a microfinance firm. As I write this, that stock is up 32% (despite the recent correction) from the recommendation price. And the business and potential upside remain strong.

This time, I believe, will be better...because I have met the management of this firm and it checks all the boxes.

I believe managerial competence and integrity are key to the success of any business - and that goes double for the banking finance sector.

This firm enjoys a strong capital sponsorship. Unlike most banks and financial firms where incentives are wrongly aligned and there is no accountability, those who run this business have enough skin in the game and a strong track record when it comes to competence and integrity.

Just to be clear, there could be more correction in the short term before the upside comes.

And that's where you have to differentiate between risk and volatility. While the former is the chance of permanent loss, the latter could be your best friend if you know how to use it to your advantage.

And there could be no better time in the Indian stock markets to befriend volatility than now. Make sure you make the most of it.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

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