Small Cap Bargains Amid the Great Correction - Profit Hunter by Equitymaster
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Small Cap Bargains Amid the Great Correction

Dec 17, 2018

Richa Agarwal, Research analyst

The Titanic sails again.

In case you haven't heard the news yet, Australian billionaire Clive Palmer 's firm, Blue Star Line, is planning to launch Titanic II - a fully functional replica of the original doomed ship that sailed and sank over 100 years ago.

Here's a question for you:

If budget was not a constraint, would you book a ticket for this replica?

Over 100 years ago, a similar offer for the original Titanic would have found many takers. After all, it was the world's biggest ship of its time - famous as the 'unsinkable ship'. Until it became notorious for going down, killing 1,500 of the ship's 2,224 passengers and crew.

But I'm not sure it would be the same this time.

Experience has taught us that size is no guarantee of safety. What makes a ship sail successfully is not its size. It is, in fact, a solid structure, and an intelligent crew that senses danger before it becomes a catastrophe. Most importantly, a ship that is agile enough to be turned away from danger when it is perceived. It is difficult to know how the original Titanic fared on the first two aspects. We surely know that it could have been saved, had it not been too big to turn quickly enough.

When someone asks me about the risks of investing in small caps (meanwhile implicitly assuming that large caps being big are safe), I try to dispel the myth using the example of Titanic.

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But the way some of the large caps - PFC, Sun Pharma, Vakrangee - have behaved, I need not draw examples from history.

Safety in stock investing, as history and the markets tell us, is not a function of size.

Don't Invest in a Sinking Ship

It's a function of business fundamentals and the competence, and most importantly, integrity of the management. Having researched small caps for a considerable part of my career, I can say with conviction that there are businesses in this space that are headed by the smartest people with strong value system in place.

And once you set a minimum liquidity cut off for your picks, they not only offer stability, but could beat some of the biggest businesses nearly three times in returns.

The long-term bet turns more in favour of small caps now, when small caps are facing significant correction for sentimental reasons. Which means that you can get into quality small caps at a huge discount.

So, dear reader, I hope you will ignore the fear pervading small caps, and build lasting wealth by betting on what I like to call Rebound Stocks - stocks that are ready to bounce back up.

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I have narrowed down and created a list of 4 stocks that are on the verge - or in some cases have already started their rebound.

Rebound Book

The first rebound stock: is a potential beneficiary of the growth in food and FMCG and discretionary consumption. It's the only company in the world to have a unique backward integration in its niche segment.

The second rebound stock: is the domestic market leader in a niche product that is used across industries. The company is set to become a pioneer in India soon with the launch of a new product with strong latent demand. What I like about the promoter is that he watches margins like a hawk. He does not hesitate to say no to opportunities where sales growth does not come along with healthy profit margins, a temptation that most are not able to resist.

The third rebound stock is a company in the business of transforming other businesses with software. With zero debt on the balance sheet, positive cash flows, healthy dividend payout and return ratios, and a great management at the helm of its affairs

The fourth rebound stock is a textile company that is setting new standards when it comes to using technology to reinvent the business. With majority of the capex behind it, this company is set to reap rewards of the efforts the management has put in over last few years

A small warning here: I can see the small cap index making some recovery. So these stocks may not remain actionable for long. Make sure you do not miss the chance, and the discount, to buy them.

Regards,

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

PS: If you have been under the impression that small caps are not safe to invest in, know that, especially now they are a safe and profitable way to make significant money in the markets. Richa Agarwal's small caps are solid businesses selling at a discount in this market crash - get them now.

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1 Responses to "Small Cap Bargains Amid the Great Correction"

Ravi

Dec 17, 2018

Ms Richa,One cannot compare stocks with Titanic.As for large caps are safe this is also not true but Tanushree spares no chance to boast about large caps being safe which she had recommended.I wrote her many times but didnot get proper reply.The stock she recommended sank like Titanic or didnot perform even after 3-4yrs and given sell call.Take a look PFC,COAL INDIA,SUNPHARMA,IDFC,TATA MOTORS,SAIL,ONGC SINTEX etc.She will soon give sell call for ONGC,IDFC,lupin etc.whatis the use of research when one cannot earn even saving a/c interest?

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