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Don't Worry About the Slowdown...this is the Right Time to Buy Small Caps

Jun 18, 2019

Richa Agarwal, Research analyst

Bad news continues to pour out!

Turns out, earnings of the benchmark Nifty 50 index touched a five-quarter low during the March 2019 quarter.

A business daily is quick to point out that the deviation between analyst estimates and actual earnings per share (EPS) has been in the range of 32% to 40% in the past three quarters.

That's a huge number!

While analyst are busy scratching their heads and going back to the drawing board again and again with their estimates of companies' earnings, they're now getting increasingly pessimistic about an oncoming slowdown.

If one begins to look around, the outlook on potential negatives are many...

The NBFC crisis, capex slowdown, policy execution missteps, mounting public bank NPAs, consumption slowdown, rural distress, liquidity squeeze, adverse fluctuations in the rupee, volatile oil prices, mass corporate insolvency, the list goes on.

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The negatives look like they are ready to take a big bite out of India Inc.

This has had its effect on stock prices too. While the rally in BSE Sensex is starting to show signs of fatigue, small cap stocks have already taken a large knock:


In fact, there is no dearth of small caps trading at their 5 year lows currently.

But with all the bad news expected in the near term, how can this be a good time to buy?


I can give a you an elaborate explanation full of numbers and examples. But perhaps the most eloquent explanation for doing this comes from legendary investor John Templeton in an interview he gave in 1985:

The low point for share prices is when most investors are expecting bad news, not after the bad news comes out.

Templeton made a huge fortune by famously buying low and selling high time and again - what most investors dream to do. And by his own admission, following that basic philosophy is what helped him do that.

The Indian economy and corporate India is going to do just fine over the long term. There is no doubt about that.

But you cannot wait for the clouds to clear if you want to take advantage of low stock prices. The time to take the plunge is when the black clouds are still on the horizon.

If you wait, it may get too late.

Stock prices don't take long to make rapid moves. But the time all the clouds have cleared, prices too will have run up significantly. Leaving you with little opportunity to pick up bargain small caps, like the ones available today.

The time to act is now.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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