Oil at US$ 60; Small Cap Stocks Pick Up Momentum - Profit Hunter by Equitymaster
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Oil at US$ 60; Small Cap Stocks Pick Up Momentum

Nov 26, 2018

Richa Agarwal, Research analyst

When I last wrote to you, I announced that small cap stocks are no longer finding any takers. Owing to the volatility in small caps, most weak hands and even the seasoned ones have made a flight to safety to large caps and other safe assets.

The main trigger for this was the latest crash in small caps which saw the BSE Small Cap Index come down by 30% from its peak.

Mind you, the small cap space has been in correction mode since the beginning of the calendar year, but its woes were exacerbated since September, weighed down by a host of macro factors.

Rising crude oil prices and a Rupee at all-time low levels followed by a liquidity crunch in the economy, did the small cap index no favours, pushing investors further away from small caps, which bore the brunt of the downturn.

No wonder, the BSE Small Cap Index has been battered down over the last couple of months.

While macro factors certainly helped the small cap slide, they were not the real reason for the downturn.

The real culprit was high valuations. In the rally that ended at the beginning of the year, small caps had reached unsustainable levels of valuations.

When small caps were racing to new peaks at the beginning of the year, everyone bet on the next big Page Industries or Eicher Motors.

They couldn't get enough of small cap stocks and were willing to pay just about anything for them. And consequently, the small cap index was touching sky-high valuations.

Among those betting on small caps, not many stopped to asked the most important question - "how much?". And those who did, managed to stay away.

Now, those who bought in to the small cap mania at its peak are now dreading the space and stay ing away from all small cap stocks altogether.

But dear reader, the very reason others are staying away from the space, is the reason I am so excited about it.

Let me explain.

One of the biggest reasons small stocks have given bad results since the start of the year - valuations - is now also the reason why they are likely to give great results from here on.

The latest crash has helped bring down even the choicest small caps to mouthwatering valuations.

At the start of 2018 you should have been fearful because everyone else was getting greedy. And if you want to make big money, now you need to be greedy while others are stricken with fear.

To add to that, macro factors which played spoilsport earlier, are also seen to be turning the tide. Crude oil which had gone up to US$ 86 per barrel on the Brent Crude index in October, has come down by around 30% to US$ 62 per barrel.

Following suit, the Rupee's depreciation too, seems to be under control as it recovered to Rs 70 per US$ from as much as Rs 74.6 per US$.

As the factors that caused the crash are slowly fading away, small caps are picking up momentum, albeit very cautiously. But mind you, volatility in the markets and especially the small cap space is far from over. This is especially true as we enter an election year.

If you have been apprehensive about entering the small cap space due to the current volatility and uncertainty, I hope this letter convinces you otherwise.

Like I have said in the past, even stocks like Page Industries witnessed a decline of over 40% from Jan 15 to April 2016.

However, that did not stop the stock from becoming a hundred bagger in the following months.

Imagine the opportunity loss had we let that crash change our view on the stock...

Now is the time to make the most of the uncertainty, pick up quality stocks, and sit back and enjoy the ride.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: With the macro factors supporting the rise of small cap stocks, there is good reason for you to get your hands on some great small cap stock right now. Click here to sign up for Richa's small cap service - and get access to her list of recommendations.

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1 Responses to "Oil at US$ 60; Small Cap Stocks Pick Up Momentum"

Ranjan

Dec 1, 2018

I don't agree with your conviction.Sebi has told small cap stocks are still over valued even after correction. Expansion of business require additional loans. Under present financial condition banks are much choose to select companies. Small cap cannot tap international market for ECB. In INDIAN market they cannot for NCD or debt securitization. Under this condition their growth prospect is subdued. Only few companies with low capital requirement can progress

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