Small-cap stocks are a good choice for long-term investors. These stocks offer the potential for strong returns, especially multibagger returns.
This prospect understandably excites retail investors. It's the reason why retail investors are most active in smallcaps compared to midcaps and largecaps. After all, 36% of the stocks in the mid-cap index today, belonged to the small-cap index 10 years ago.
Of course these stocks are more volatile than their larger counterparts. They are also less liquid in the market. And there is a relatively higher chance of losing your investment compared to midcaps and largecaps.
You should be comfortable with their stock prices fluctuating greatly. The upward journey will not be unidirectional. There will be sharp corrections in between that you won't be able to predict or dodge.
But over years and decades, the examples of many successful smallcap investors, as well as many multibagger small-cap stocks, have shown the risk to be well worth it. This is especially true of you're willing to put in the time and effort to find the best smallcaps.
When it comes to smallcaps, you can succeed in the game of long-term investing if you focus on the quality of the business and the management, your personal asset allocation, and margin of safety in valuations.
This will give you an edge as an investor in small-cap stocks. And there's a good chance the smallcaps you pick today will grow to be a future midcap.
This brings us to the question of which smallcaps to consider.
Well, you have the choice of spreading your net wide and considering the entire smallcap space. There are thousands of small-cap stocks to choose from. However, many of them are microcaps and penny stocks. These may be too risky for most investors.
Also, the wider your initial net, the more strict and detailed your screening process needs to be.
Often investors prefer to start with a highly filtered list based on some important criteria. These could be based on fundamentals, marketcap, or sector specific.
In this article, we will consider the sector specific initial filter and consider small-cap stocks from the IT sector. For a sector overview, read our IT sector report.
During the pandemic and lockdowns, the IT and broader technology sectors, were in spotlight and boomed big time. This was due to the increasing importance of working from home.
However, things have changed quickly... and how!
The IT sector, one of the strongest sectors in the country, is now under pressure due to recent global crisis and fears of a recession. So far this year, the Nasdaq Composite index, which has the big tech stocks like Amazon, Tesla, Google, among others, has slipped by 30%.
And sure enough, Indian IT stocks are falling. They tend to follow the Nasdaq's trend. So if the Nasdaq falls overnight, Indian IT stocks usually fall the very next day.
The BSE IT index has tumbled 26% so far in 2022, similar to the Nasdaq's performance.
The decline in price has made several IT stocks attractive from a valuation perspective. In this article, we'll discuss 5 smallcap IT stocks that are fundamentally strong enough to be on your watchlist.
Keep a close watch on these 5 stocks...
Coforge, formerly known as NIIT Technologies, is a multinational Indian information technology (IT) company headquartered in Noida, India, and New Jersey, USA.
Coforge is a market leader in product engineering, leveraging cloud, data, integration, and automation technologies to transform client businesses into intelligent, high-growth enterprises.
The company has a presence in 21 countries and 25 delivery centers spread across nine countries.
Recently, Coforge entered into a partnership with Estee Express Lines to bring agile and next-generation solutions to the transport & logistics industry.
To know more about the company, check out Coforge company fact sheet and quarterly results on our website.
Incorporated in 1990, Persistent Systems is founded by Dr Anand Deshpande and Mr S. P. Deshpande. Currently, it is one of the leading outsourced product development (OPD) companies in the world.
The company designs, develops and maintains software systems and solutions, create new applications and enhances the functionality of its customers' existing software products. PSL delivers services across all stages of the product life cycle.
The company provides software solutions organized in three segments which include cloud life cycle management, internet of things (IoT), unified endpoint management, endpoint detection and response, and big data analytics.
The firm also offers product engineering services, platform-based cloud solutions, and internet protocol-based products. Most of the firm's revenue gets derived from the technology services segment.
To know more about the company, check out Persistent Systems company fact sheet and Persistent Systems quarterly results.
Formerly Infotech Enterprises, Cyient has come a long way. From humble beginnings as a GIS data conversion vendor, this company has transformed to a formidable engineering player.
It operates in critical sectors such as aerospace, defence, communications, and utilities - sectors which, incidentally, contribute a lion's share to the company's overall revenues.
Cyient is among the very few firms in the world to provide a complete range of software services to the aerospace industry. It collaborates with digital map developers to help them solve real-world issues in the automotive sector and make self-driven vehicles safer and smarter.
For self-driving cars, AI can detect changes in the real environment and update maps in real time. The navigation helpers which Cyient makes aid autonomous vehicles and avoid collisions.
China's largest search company Baidu believes that in the future, smart maps for autonomous vehicles will be a bigger business than web search.
To know more about the company, check out Cyient company fact sheet and Cyient quarterly results.
Founded thirty years ago, Sonata Software provides popular software products for everyday business needs. The management positioned the company as a premium re-seller of important software packs.
It's the largest value added re-sellers of Microsoft products in India. In fact, the company is a go-to player for readymade, value-added software in India. Sonata tied-up with IBM, Oracle, Intel, HP, SAP, Adobe, Symantec, Red Hat, VMware, Computer Associates, and others.
Despite the low margins, this segment is a cash cow with high RoE. It also opens up cross-selling opportunities to provide higher-margin IT services.
To differentiate itself from the big IT firms in the traditional IT services business, the company has positioned itself as a nice service provider in ERP, digital services, among others. It mainly caters to the travel and retail sectors.
To know more about the company, check out Sonata Software company fact sheet and Sonata Software quarterly results.
eClerx Services is an Indian IT consulting and outsourcing multinational company based in Mumbai and Pune engaged in providing solutions to Fortune 500 companies regarding their business process management, automation, and analytics services.
Being in the service sector, eClerx Services has quite a high-profit margin. The lowest profit margin in the past 5 years was 14%, which is quite high in itself.
eClerx has a strategic approach for inorganic growth. The company believes in the method of acquisitions, as is the case for many good IT companies.
The financials of the company paint a very strong future of the company. It has zero debt on its books.
To know more about the company check out eClerx Services company factsheet and eClerx Services quarterly results.
Lithium is the new oil. It is the key component of electric batteries.
There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.
So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.
If you're an investor, then you simply cannot ignore this opportunity.
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