»Profit Hunter by Equitymaster

On This Day - 29 MAY 2019
How to Change Your Strategy for Stocks Post Modi's Win...

Richa Agarwal, Research analyst

Post the elections, a very interesting trend is beginning to shape up.

Since the election results have been announced, the BSE Sensex may have been busy stealing the limelight by touching new highs...

But something a lot of investors are missing out on - and what may just be the beginning of a trend is - is that small cap stocks are moving up way faster than then their larger brethren.

Sample this: In the short time since the elections, while the BSE Sensex is up 1.5%, the BSE Smallcap index is up 4.1%.

And while this may be too short a period to draw any conclusions from, there do appear to be signs that this may only be the start of a trend in the months to come.

For a good part of 2018 and since the start of 2019, foreign institutional investors (FIIs) had been selling and smaller companies had been tumbling.

This state of affairs has meant that the environment has been increasingly marked by neglect in smaller companies. Investors, who were falling head over heels for small caps at the start of the year, lost interest big time.

In fact, liquidity in value terms for the BSE Small cap index was down from a high of over Rs 50 billion to just Rs 5 billion by March of this year.

Liquidity had all but dried up in small cap stocks.

But you see, this is a very natural part of the small cap cycle as liquidity tends to be quite elastic with significant increases as stock prices and investor enthusiasm increase and the reverse when prices and interest levels fall.

While this could make buying and selling stocks in larger quantities a little difficult, other than that in itself this is nothing to worry about. Especially if you have patient capital that can sit out any bad liquidity patch and the investor maturity to ride out the extreme volatility.

So you see, it's all part of the market cycle.

But why bother with them at all?

Well, simply put, the potential profits in small cap stocks at such times are just too hard to ignore.

In fact, the best stocks in the small cap world can be bought at the most lucrative prices when they are being neglected by investors.

And at times such as these when the whole category - i.e. small cap stocks as a group - are being neglected.

Investors have always had a manic love/hate relationship with small caps.

And they begin to neglect them when they're in the 'hate' phase and want nothing to do with them.

This usually happens when they've fallen or gone nowhere for a while. It is then that neglect begins to creep in, volumes and liquidity in these stocks starts drying up, investors start ignoring fundamentals, and stocks begin to fall further getting caught in a vicious downward spiral.

This is what was happening all this while.

And that's where things really get interesting. Because that downward spiral that they were stuck in for all this while is now - post the election results and the return of foreign as well as domestic investor enthusiasm - finally showing signs of giving way to an up cycle.

And when small caps start rising, they can set the charts on fire!

The low competition in such stocks from other investors, and the resultant opportunity to scoop them up low and early - before others get on their trail in a few years - offers the potential for massive profits. Profits of the kind that are too hard to ignore.

I don't know how what will happen over the next few days. But I do know that mouth-watering opportunities exist today in many small caps that are selling at bargain valuations thus making them poised to generate a lot of wealth in the years to come...

While the Sensex and large caps have had their dream run, it may be the turn of the undiscovered small caps now.

Get in before investors drive up their prices once again!

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

PS: The Modi win could give the markets just the boost it needs - but are you prepared with the right stocks in your portfolio to take advantage? Here are 4 rebound stocks that are poised to benefit from Modi's continued reign - get them now.

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