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  • Dec 1, 2022 - 5 Undervalued Smallcap Stocks to Watch Out for in 2023

5 Undervalued Smallcap Stocks to Watch Out for in 2023

Dec 1, 2022

5 Undervalued Smallcap Stocks to Watch Out for in 2023

When you think about investing in a small-cap stock, the most important thing you must consider is its underlying business.

You want a fundamentally strong business that has been around for a while. A business with a history of robust earnings and a healthy balance sheet.

But even when you have found it, you can't simply buy it at any price.

You must invest in it at a discount to its fair value so that you have a margin of safety. So, on the off chance, the business doesn't do well, you will have a buffer.

In a 2008 letter to Berkshire Hathaway's shareholders, Warren Buffett wrote -

  • Price is what you pay; value is what you get. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.

    Price and value are two sides of the same coin.

So now that you know the importance of value, let's look at the top five undervalued small-cap stocks to watch out for in 2023. These companies are trading at a discount to their peers.

#1 Cosmo First

First on our list is Cosmo First.

Cosmos First is a pioneer in BOPP (biaxially oriented polypropylene) films.

These films are for the FMCG sector, used in flexible packaging applications. Apart from this, the company also caters to the tapes, textiles, and industrial sectors.

The company is a leading player in the polypropylene segment. It has redefined its cost structure to advance as the most cost-effective player in the world.

Over the years, the company has successfully restructured its business, moving from manufacturing commoditised products to specialised value-added products. This is mirrored in the company's performance.

The company's revenue has grown at a 4-year CAGR of 13.5%. Profitability has been robust as well. The company's net profit has grown at a 4-year CAGR of 57.3%. This strong growth came on the back of capacity and margin expansion.

Cosmo's industry dominance has propelled its margins to culminate into healthy and strong return ratios too. The return on equity has jumped from 9.1% in the financial year ending 2019 to 33.3% in 2022.

The balance sheet is strong, sporting a debt to equity of 0.4. The company distributes dividends generously. Its 4 year average dividend yield stands at 3.5%.

The stock is trading at a discount to its 10 year historical average. It is trading at a Price-to-Earnings (P/E) of 5.8 times, a discount of 21% to its historical average.

This is attributable to the weakness in numbers reported in the quarter ending September 2022. While the sales fell by 7.5% the profits by 21% compared to the previous quarter.

However, this does not take away from the fact the company boasts a strong business and is well-positioned to grow in the future.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Antony Waste

Next on our list is Antony Waste.

Antony Waste is a leading player in the waste handling sector. It operates one of the largest waste processing units in the country, offering complete waste handling solutions.

With over 19% market share, the company has carved out a niche for itself. The company continues to invest in its core business and aims to grow it substantially in the coming years.

The unique business model and leadership status have allowed the business to grow its sales and profits by three times in the past five years. This growth has propelled the return ratios, reporting a 5-year average return on equity of 20%.

It has also helped the company build a strong balance sheet with negligible debt on its book.

Despite strong business fundamentals and leadership status, the company trades at a P/E of 11.5 times.

The newly listed stock touched its all-time high in September 2022 but tumbled quickly after that. This fall was led by a 15% de-growth in the sales reported in the quarter ending September 2022, compared to the previous quarter.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Monte Carlo

Third, on our list is Monte Carlo.

A dominant leader in the winter woollen wears segment, Monte Carlo enjoys a market share of more than 50%.

The business is seasonal. A large part of the business leans on woollen wear and winter sales, leading to an erratic performance of the business. However, the management is taking active steps to address these risks related to inventory and receivables.

They are trying to expand the cotton segment of the business, thereby reducing the dependence on the woollen segment.

Monte Carlo has enjoyed a smooth road to profitability. The company's sales have grown at a 4 year CAGR of 11.9%, while the net profit has grown at a 4 year CAGR of 13.8%.

The return on equity has also been strong, averaging 12.9% over five years. The company has rewarded its investors well, sporting a five-year average dividend yield of 3.2%.

The balance sheet is also pristine, with no debt on its books.

However, despite the strong historical performance, the stock is trading at par with its 10-year historical average P/E of 13.4x.

This can be attributable to the stable growth in the quarter ending September 2022. While the sales grew by a measly 2%,the net profits fell by 12.5% compared to the same period last year.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Shreyas Shipping

Fourth on our list is Shreyas Shipping.

Shreyas Shipping is a part of the 40 year old global conglomerate Transworld Group. The company is a pioneer and market leader in domestic coastal container shipping services and coastal transhipment services covering most major ports and container terminals on the Indian coast.

It commands a majority market share of over 90% in the export-import transhipment business and more than 52% in the domestic container business.

India has a vast coastline. However, when it comes to coastal shipment, it remains widely unutilised.

The cost per tonne-km of moving cargo via coastal route can be 60-80% cheaper than moving by road or rail. Despite this, 60% of the cargo movement is by road, 34% by railway and only 6% by coastal shipping.

Internationally, cargo movement is 25-30% by road, 50-55% by railways, and 20-25% by waterways.

This disparity highlights a massive opportunity for robust growth. Shreyas Shipping is well-poised to benefit from it.

While the sales haven't grown much, the company's net profit has more than doubled in four years, growing at a 4 year CAGR of 27.4%. This has led to strong growth in return ratios, with return on equity doubling in five years.

The business is also cash rich, allowing the company to maintain a low debt-to-equity ratio of 0.3.

The 5 year average dividend yield stands at 0.3%.

However, the stock is trading at a Price to Book Value (P/BV) of 0.88 times, a 20% discount to its historical 10-year average P/BV of 1.1 times.

The undervaluation of the stock is led by poor performance in the quarter ending September 2022. Both sales and net profit fell by 10% and 18%, respectively, compared to the previous quarter.

To know more about the company, check out its financial factsheet and its latest financial results.

#5 Technocraft Industries

Last on our list is Technocraft Industries.

The company is a predominant player in the precision engineering sector, with a large part (more than one-third) of this segment focussing on drum closures. This product seals leakages in large drums.

It is the second-largest drum closure player in the world and enjoys a worldwide market share of 36% (ex-China). Apart from drum closure, it also has scaffolding and formwork (metal pipes and tubes - a temporary structure to hold people and material on construction sites) and a cotton yarn business.

Technocraft has turned around its textile business, from reporting a loss at the operating profit levels in the financial year 2021 to a profit of Rs 470 m in 2022.

The drum closure business is a cash cow for the company. And now, the turnaround in the textile business is likely to boost profits further.

The company has grown its sales and net profit at a 4 year CAGR of 12.8% and 22.9%, respectively, over the last five years.

The healthy margins have resulted in an average return on equity of 15.8% over the last five years. Despite negligible debt and a ton of cash on the books, the company does not pay dividends.

The stock trades at a 10% discount to its median P/E of 9.3x.

The stock hit its 52-week low in September this year owing to weak quarterly results. While the sales fell by over 10%, the net profits contracted by 8% in the quarter ending September 2022, compared to the previous quarter.

To know more about the company, check out its financial factsheet and its latest financial results.

In conclusion

As attractive as smallcap stocks maybe, they come with their own set of risks.

It is important to understand that the prospect of outsized returns comes in tandem with high volatility. But there is a way around it; invest for the long term.

Not only will it help you ride out any short-term market swings, but it will also give the stock time to realise its full potential.

Small businesses are more agile and have more room to grow in comparison to their larger peers. So once the company grabs a great opportunity, the business can quickly get on the fast track to growth.

But no matter how great the returns maybe, you must do your due diligence of before parting with your hard-earned money.

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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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