Keep This Watchlist Handy During the Market Correction

Has the recent market correction taken you by surprise?

To be honest, it was long due, especially in smallcaps.

Just before the correction, a huge anomaly was seen in the markets. Smallcaps were trading at a significant premium over largecaps.

The median PE or price to earnings multiple for smallcaps (stocks with a marketcap of Rs 3 bn and ranking below 250 by marketcap) had risen to 34.5 times. This compared to 24.5 times for largecaps (top 100 stocks by marketcap).

Segment (By Marketcap)	PE Ratio	Share in MCAP (%)	Share in Net Profits (%)
Largecaps (Top 100)	24.5	61%	69%
Midcaps (101 to 250)	36.6	19%	15%
Smallcaps (Below 250th Rank)	34.5	20%	16%

Source: Ace Equity, Equitymaster

It neither makes sense on an earnings basis, nor on a trailing earnings growth basis.

In fact, as per the latest financial stability report by RBI and Bloomberg estimates, there has been a huge gap between estimated earnings growth versus required earnings growth for Nifty Smallcap 100 index to justify its valuations.

As you can see from the chart below, while this gap exists across market caps, it's the highest for smallcaps.

Required Earnings Growth to Justify Existing Valuations

In other words, the valuations for smallcaps were expensive even if you factor in future growth. As such, recent corrections are not surprising.

Now I do not know if the markets will rebound soon, or if the correction will be deeper. That's something to bother about if you invest with a short term time horizon.

If you are a patient long term investor instead, Mr. Market is likely to offer you decent bargains.

As such, it's time to get your watchlist ready.

Speaking of which, I would like to share a specific filter on which I have been screening stocks for some time now, i.e. insider purchases from the open market.

While this is an interesting metric to track across market cycles, in recent times, its relevance has increased in my view. That's because this is a time when insider buying activity is in stark contrast with overall insider activity trends.

You see, since 2018, insider selling has been up six times. The quantum of sales by promoter in the primary and secondary markets has been at record levels.

Fundraising at Record Levels (IPO, FPO, QIP)

Bucking this trend, there is a set of promoters that are buying their stock from the open market.

Now if you think about it, promoters are the people with the biggest stakes in the businesses they own. They are also the most knowledgeable about what's happening in the business and the industries they are operating in.

If they are willing to buy more of the stock of their company from the open market and increase their skin in the game, it shows their confidence in the business. This is something that outsides may take a while to figure out.

In recent months, here is a list of stocks that have seen sizeable open market purchases by insiders/promoters. I have focused on the ones with respectable quantum of purchase and the ones trading at a discount or close to the average buy price for the insiders.

Stocks With Insider Buying

Company Name	Value (Rs m)	Average Buy Price (Rs)	Stock Price on 13 Jan 2025 (Rs)	Discount /Premium to Avg Buy Price
Fairchem Organics	380	1,171	950	-18.9%
Mangalam Cement	177	931	948	1.9%
Indegene	82	593	603	1.7%
Bharatwire Ropes	48	226	187	-17.1%
Kilburn Engg	36	476	438	-7.9%
NCC Ltd	30	283	238	-15.9%
Kross	23	209	183	-12.2%
Krsnaa Diagnostics	20	871	830	-4.7%

Source: BSE, Equitymaster

Now please do not consider this as a recommendation. No view is being implied through the table above.

These are just stocks I believe deserve to be on your watchlist and need to be researched further. Afterall, it's not often that market gives a common investor an opportunity to get a better deal than the promoters.

For more such updates, subscribe to Profit Hunter.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)