8 Smallcaps to Lockdown Amid a Once in a Decade Opportunity

Apr 14, 2020

Richa Agarwal, Research analyst

Today, PM Modi extended the lockdown till 3rd May.

It's bad news for the economy that has been brought to a screeching halt by coronavirus, but drastic times demand drastic measures.

We are face to face with one of the biggest threats ever faced by multiple generations.

There is hardly any precedent in the history to fall back on and draw comfort from.

I hope you are all safe, well stocked for the lockdown and are using this time constructively.

Last time I wrote to you, I mentioned the second order effects that will continue to impact the economy even post the lockdown.

Recently, I shared with Hidden Treasure subscribers, we are relatively early in the crisis stage compared to other countries. I believe it is best to be cautious on the macro economic outlook.

There will be a lot of damage to businesses, both in the organised and informal segment.

Most of the forecasts that were made for the listed companies are unlikely to come true. There will be a meaningful impact on earnings, at least in FY21, given this black swan event. The horizon period for good returns from stocks is likely to stretch longer.

I hope you are prepared for challenging times ahead and have enough cash and liquid assets to sail through it.

And once you have taken care of that, I believe it's a great time to buy value and growth stocks in a staggered manner.

Given the sharp sell off in the stock markets, the opportunities are aplenty, but there are some that I like better than the others, keeping in mind the crisis.

I wrote about one such opportunity in last time - a specific smallcap tech firm that is offering the government tech based solutions to contain the virus outbreak.

These are the businesses in India with a strong capacity to suffer and survive the crisis, if it prolongs.

I have recommended these stocks to my Hidden Treasure subscribers.

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So what makes these companies better placed to survive the crisis?

The factors that I have kept in mind while selecting these stocks include:

  • Market leadership in niche segments
  • Diversified business model
  • Healthy Financials - High returns, low or nil debt, healthy interest coverage ratios (revenues will be hit while fixed costs and interest payments will need to be serviced during Covid 19 crisis).
  • Healthy dividend yields
  • Strong management quality

It is further comforting to see insiders are buying some of these stocks in the month of March 2020.

Financial Snapshot

Company Return on Net Worth (%) Return on Capital Employed (%) Debt to Equity Interest Coverage (Earnings before interest and tax/Interest) Net profit Margin (%) Dividend Yield (%) TTM P/E*
Stock #1 20.1 20.8 0.1 12.6 11.8 1.5 7.1
Stock #2 17.6 19.4 0.5 6.0 8.6 2.3 12.9
Stock #3 18.5 26.7 0.0 222 14.5 2.1 9.1
Stock #4 19.3 23.2 0.1 14.3 10.5 6.7 5.2
Stock #5 17.1 21.7 0.0 68.2 17.1 3.3 9.8
Stock #6 20.8 30.8 0.0 119.0 23.8 5.4 12.1
Stock #7 15.8 21.8 0.0 87 9.8 2.2 11.4
Stock #8 35.4 54.7 0.0 4871 9.1 5.4 15.6
Source: Ace Equity
* Trailing 12 months price to earnings
Return on net worth and return on net capital for FY19
Debt to Equity as per September 2019 balance sheet
Interest coverage and net profit margin are on trailing 12 months basis

It's not just the fundamentals, but a decent margin of safety at these valuations as well that's working in the investors' favor in these stocks.

Hidden Treasure subscribers can listen to my webinar on these stocks here.

If you don't have a subscription to Hidden Treasure you may sign up here.

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Given the uncertainty, it is difficult to predict the bottom. Nonetheless, at current valuations, I believe the long-term return potential in these stocks is great.

However, I recommend you to not go all in and have a staggered buying approach.

I hope you will not miss this once in a decade opportunity to make the most of the rebound in these smallcaps.

Stay safe!

Warm regards,

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

PS: Read about my #1 stock pick for 2020 here.

PPS: On 22 April, Equitymaster celebrates its 24th birthday. As we begin our 25th year, we would like to thank you for your support.

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5 Responses to "8 Smallcaps to Lockdown Amid a Once in a Decade Opportunity"

binit

May 10, 2020

MRF?

Like 

Kahmed

Apr 23, 2020

Send stock name my email and suggest me

Like (1)

hari singh nayak

Apr 18, 2020

Equity master is excellent

Like (1)

Manya

Apr 16, 2020

I interested

Like (1)

Ajay VAKIL

Apr 16, 2020

Can u send me the list of 7share.and also one stock caror pati share

Like (3)
  
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