If you were investing in small cap stocks in the year like 2016 and 2017 and stopped investing now due to recent carnage in broader markets, believe us you are making a bigger mistake. Do not allow your emotions to take control of your equity investment decisions, instead inculcate habit of investing in discipline manner.
If you analyse BSE Small Cap Index YoY returns, you will realise that small cap index not only recovered but also delivered astonishing returns in short span of time once tide turns favourable. In last 16 years, small cap index delivered significantly higher returns in single year every four years. In past, we experienced fierce rally in small caps in years like 2007, 2009, 2014 and 2017. During good times when overall economy is doing well, small cap stocks use to deliver mind boggling returns turning multibaggers in period of just 12 to 24 months.
BSE Small Cap Index went up by 69% in 2014 and during the same year numerous small and mid cap stocks turned multi-bagger. Scenario was similar in 2017 when BSE Small Cap Index rallied by 58%, since Jan 2018 broader market went into bear grip with significant sell off in many small and mid caps due to expensive valuations and series of negatives developments followed by slowdown in economy.
Moreover, BSE small cap index have not given negative returns for 2 consecutive years over last 16 years, small cap index has given negative returns of -23.4% in 2018 and is down by another -14% during this year. If history repeats itself, we can expect a sharp recovery in small caps over next 3 months with BSE small cap index giving a close well above 14767, i.e. an upside of 16.2% from current levels.
Coming back to the current situation, the small cap index is down by 37.1% from its peak made in January 2018. The severe decline in broader markets started last year with introduction of LTCG tax, followed by series of negatives developments during 2018 and 2019 like IL&FS defaults, liquidity crisis in NBFCs, continuous downgrades of companies by rating agencies, lenders dumping stocks of debt laden companies, and ongoing slowdown in economy with falling automobile sales and consumption demand. Severe fall in stock prices over last 20 months have not only taken the steam out of small caps but also made companies available at significantly discounted valuations compared to large caps. Fear and misinformation has shattered investor’s confidence and hence quality businesses are back to cheap valuations after a long time. Post steep fall in stock prices, many small caps are now offering once in a decade investment opportunity!
The reason is the carnage in stock prices of many well-known small and mid cap companies. Individual small and mid cap stocks are touching 52-week lows every other day and individual damage to most of the stocks in this category is to the tune of 60-70%, some even more than that from their peak prices of 2017 / 2018. Such severe and fast erosion of capital in small and mid caps have butchered investors interest towards this category. Retail investors have taken the back foot and lost their faith and conviction towards investing in small and mid caps due to existing pain in their portfolios.
However, we are quite excited about opportunities emerging in small and mid cap space during this year. The fall in stock prices of many small and mid caps by more than 50% from their peaks has not happened for the first time. This has happened in past and companies with good business fundamentals have always bounced back strongly later delivering multi-bagger returns. When overall market sentiments are negative like we are witnessing now, quality businesses also face the heat. As bad stocks go down, good stocks go down with them too. But good companies make a stronger come back with earning revival once economy cycle starts its upturn.
We have been saying this time and again - don’t try to time the market. We firmly believe that to get the best returns in the long term, investors should invest in a staggered and disciplined manner irrespective of market conditions. Investing through ups and downs of the market lets your investment grow and averages the purchasing cost. Equity investment is a serious business meant for long term investors. Trying to get in when the market goes up and getting out when there is a correction does not help you to create wealth.
Let us share some valuable insights to make you understand why we believe buying the right set of small and mid caps now can be a massive wealth creating once in a decade opportunity. To make our readers understand bull as well as bear phase of markets, we have covered long term monthly charts of some of our own small and mid cap stocks recommendations (released under Hidden Gems and Value Picks) over last 9 years which at one point of time were down by 50% to 70% from their peak but turned out to be mega multibagger stocks in longer run delivering upto 64X returns.
Below are the Monthly Chart (since Jan'10) of 8 Multibagger Small Cap Stocks released under Hidden Gems service.
3. Roto Pumps (Hidden Gem released on 05th Aug'12) - Read Old Report