X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Do smallcaps = large profits right now? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 30, 2010

    Do smallcaps = large profits right now?

    In our previous article, we discussed whether midcap stocks seemed to look attractive at this point in time. We used the BSE-Sensex as a benchmark for the same. This time we will be discussing whether the BSE-Smallcap index seems overvalued or undervalued. There are over 500 stocks in this index, which is almost twice the number in the mid-cap index and 18 times the number in the Sensex. Although this is a large universe to choose from, a large majority of them are virtually unknown. But, some are household names including Fame India, Spicejet, Moser-Baer, Provogue etc. Let us now see, how they have been performing on a collective basis.

    The BSE-Sensex is just around 17% short of its historical highs, seemingly overvalued. Let us now see what this indicates for the smallcap stocks, whose representative index (the BSE-Smallcap Index) is benchmarked against the BSE-Sensex?

    Below we have displayed a comparative data for both the indices BSE-Sensex and BSE-Smallcap index.

    Data Source: CMIE Prowess

    If one had invested Rs 100 at the beginning of 2008 in the BSE-Sensex and the BSE-Smallcap indices each, it would have been worth Rs 90 and 72 respectively. This indicates that the Sensex has outperformed the BSE-Smallcap Index over this two and a half year period. However, the BSE-Smallcap Index has by far outperformed the BSE-Sensex over the last year (2009) as well as during the year till date (YTD; January 1 2010 to August 24 2010). While the BSE-Sensex has risen by 17% over the last year, the BSE-Smallcap Index has risen by 49%. As for the YTD comparison, the BSE-Sensex is up by 5%, while the BSE- Smallcap Index is up by 18%. As we saw earlier, the BSE-Midcap index was up 17%, showing that their performance was more or less in line.

    However, the best way to gauge the attractiveness of stocks is to look at their price to earnings ratio (PE). This helps shows if the run up in stock prices is justified viz-a-vis an increase in earnings or profits to shareholders. The same works for analysing an index, which is basically a collection of stocks. A good way to gauge the same is to compare the valuations of the BSE-Smallcap Index with the benchmark index, the BSE-Sensex.

    Below is a chart indicating the PE ratios of both the indices since 2008. We have also shown the average PE ratios of both these indices during this two and a half year period (prior period data was not available at this time). While there is no doubt that the BSE-Smallcap Index would trade at lower valuations as compared to the BSE-Sensex (for multiple reasons), the main question is that despite this, are smallcaps attractive at this point in time?

    Data Source: CMIE Prowess

    We shall look at the next chart to find out. Below is a chart displaying the difference in valuations over this period. We have calculated the same by dividing the PE ratio of the BSE-Sensex by the BSE-Smallcap Index.

    What does this chart foretell? Well, as the ratio moves towards the 1 times mark, this means the difference in the PE ratios of the two indices is less. This could mean two things Either that the Sensex is undervalued or that smallcaps are expensive. What we can also learn from this is that the market is pricing midcaps as well as smallcaps similarly. This is despite the fact that smallcaps are supposed to be more volatile.

    Data Source: CMIE Prowess; *Average period considered as Jan 2008 till date

    Similarly, when the ratio drifts away from the 1 times mark; this could indicate that the BSE-Sensex is expensive or that the smallcap stocks look fairly attractive.

    What does it indicate at this juncture?

    Well, considering that the BSE-Sensex is trading at a price to earnings of about 21.8 times, it seems to be a tad on the expensive side (as compared to its long term average valuation of about 16 to 17 times). The BSE-Smallcap Index's valuations seem to be close to the 1 times mark, indicating that smallcaps (as a whole) also seem to be 'not so attractive'. Since, they trade at a slight discount to midcap stocks, it seems that both indices, on the whole seem to be fairly valued at this point. This means that most of the upside is already priced in.

     

     

    Equitymaster requests your view! Post a comment on "Do smallcaps = large profits right now?". Click here!

    5 Responses to "Do smallcaps = large profits right now?"

    Prabhu S Hanagodimath

    Sep 12, 2010

    Dear Sir,
    its very interesting & informative.please provide
    small cap stocks which can give return up to 50% in
    5-6 months

    Like 

    vgr

    Sep 8, 2010

    smallcaps

    Like 

    gomshen

    Sep 7, 2010

    Very Informative. If possible SEnd such articles thru mail as well. Like 5 minute Wrap up. Very Good analysis.

    Like 

    tanmoy bhattacharya

    Sep 6, 2010

    i want small cap script which absolute return 1 to 3 months.

    Like 

    l.Krishnamoorthy

    Sep 3, 2010

    Article is well written and it is made very easy to understand with the comparative graph. The concluding idea of both mid cap and small caps are valued full is correct hence entering in the small caps now can be withheld for time being.

    Like 
      
    Equitymaster requests your view! Post a comment on "Do smallcaps = large profits right now?". Click here!
     

    More Views on News

    Tata Consultancy Services (TCS): A Decent Start to FY17 (Quarterly Results Update - Detailed)

    Jul 14, 2016

    Tata Consultancy Services (TCS) has declared results for the quarter ended June 2016. The company has reported a 3% QoQ increase in consolidated sales while the consolidated net profit was up 0.3% QoQ.

    Tata Motors: A Profitable Fourth Quarter (Quarterly Results Update - Detailed)

    Jul 8, 2016

    Tata Motors Ltd has reported a 19% YoY and 202% YoY growth in sales and net profits for the quarter ended March 2016.

    Idea Cellular: Interest Costs Hurt Profits (Quarterly Results Update - Detailed)

    Jul 4, 2016

    Idea Cellular has reported a 12.4% YoY growth in the topline and a decrease of 0.4% YoY in the bottomline for the quarter ended March 2016.

    It's Okay to Be Late to the Game If There's a Lot of Game Left to Be Played (The 5 Minute Wrapup)

    May 25, 2017

    How identifying megatrend helped the India Letter to spot potential multibaggers.

    Avoid These Popular Investments (Vivek Kaul's Diary)

    May 25, 2017

    Should you just buy a low-cost ETF that tracks the S&P 500 and sit tight?

    More Views on News

    Most Popular

    New IIP Shows Demonetisation Slowed Down Indian Manufacturing Growth Big Time(Vivek Kaul's Diary)

    May 16, 2017

    The manufacturing growth between December 2016 and March 2017 fell to 1.6 per cent as against 6.9 per cent between April and October 2016.

    How to Generate a 17.28% Profit in Days(Daily Profit Hunter)

    May 12, 2017

    Apurva shows how a simple but effective pattern has helped him generate returns like 9.09%, 11.41%, and 17.89%.

    Read This Before Throwing Out the 'Bad' IT Stocks(The 5 Minute Wrapup)

    May 12, 2017

    A template that will help you identify the 'emphatic sells'.

    Just Like Before, the Market is about to Crash(Outside View)

    May 17, 2017

    Markets are at record highs. Fear is at record lows. How does this end? When does this end?

    Are You Saving & Investing Enough To Become A Crorepati?(Outside View)

    May 13, 2017

    Savings alone can't help you become rich. Investing in wealth generating investment avenues strategically is the key.

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-6143 4055. Fax: +91-22-2202 8550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    S&P BSE SENSEX


    May 25, 2017 03:37 PM

    MARKET STATS