Why We Are Still Bullish on Small Caps - Views on News from Equitymaster

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The Equitymaster Research Digest

Why We Are Still Bullish on Small Caps
Sep 28, 2016

Brushing with lifetime highs in an increasingly uncertain global environment, markets, especially small caps, are making investors jittery.

It was in February that the broader markets witnessed the sharpest selloff of the year. While all indices recovered, the rise in small cap index has been a spectacular 37.1%, versus 22.7% for the Sensex.

Huge liquidity chasing the markets has been a strong tailwind for good, bad, and ugly businesses. Stories, more than fundamentals, are driving stocks and sentiments. The slew of IPOs in the small-cap space and their oversubscription further underscore this.

Most of our readers already know about our skeptical stance on IPOs. Of the 68 IPOs we covered from 2008 to 2015, 61.7% have offered negative returns. That said, we believe one cannot ignore all fresh offers. Amid the heap could be that rare company offering real value. Our special report, The Handbook of IPO investing, is an attempt to separate the wheat from chaff among the IPOs.

Back to the listed small caps... We agree that such times warrant extreme caution while picking stocks. However, if anyone quotes the indices and tells you to stay away from small caps, give them a wide berth. The small cap index, after all, is not a good representation of small caps.

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