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Power of Investing in Small Caps
On 2 January 2002, Crompton Greaves had a market cap of Rs 115 crore and its stock was at Rs 1.80. Today, on 20th Sept'13 the stock price closed at Rs 93 and the company's market cap is Rs 5,963 crore. Rs 1 lakh invested Crompton Greaves in Jan 2002 is worth Rs. 51 lakh today.
If these factors scare you but you still want to gain from the upside potential of such stocks, Saral Gyan Hidden Gems is an ideal choice for you.
Regards,
If you had invested Rs 1 lakh in Sesa Goa on 1 January 2002, your money would have grown to Rs 4.6 crores by now. Back then, Sesa Goa was a small company with a market capitalisation, or market cap, of Rs 99 crore and a stock price of Rs 1.28.
It has been one of the great wealth creators in the Indian stock market and given more than 50 percent annualised return over the last 11 years. The company have a market cap of Rs 52,875 crore on 20 September 2013 while its stock is trading at Rs 178.
On 2 January 2002, Crompton Greaves had a market cap of Rs 115 crore and its stock was at Rs 1.80. Today, on 20th Sept'13 the stock price closed at Rs 93 and the company's market cap is Rs 5,963 crore. Rs 1 lakh invested Crompton Greaves in Jan 2002 is worth Rs. 51 lakh today.
Do you own such stocks which can give you similar returns in future?
The number of small-cap stocks is large and finding a quality stock that can give high returns over a long period is tough even for equity analysts. One reason is that such stocks usually have a short history and are not tracked by many analysts and brokerage houses. Then there are risks such as low liquidity, governance concerns and competition from larger players.
Scores of once small companies have over the years grown big, giving investors a 30-50 per cent annual return over 10-15 years and creating fortunes for investors. However, more often than not, we find ourselves at the wrong side of the fence and regret our inability to spot such stocks on time.
It’s a fact that 10 Hidden Gems out of 30 released by our equity analysts in last 3 years have given more than 100% returns. Stellar performance during tough time of stock markets (all major indices have given negative returns since last 3 years), imagine how these companies will flourish during good times.
Buying Strategy for Small Caps
1. Go for companies with low debt ratio (preferably less than one)
2. A high interest coverage ratio (above 3x) and a high return on equity are big advantages
3. Avoid companies with huge liabilities in the form of foreign currency convertible bonds / external commercial borrowings
4. Look at the quality of the management, its governance standards and how investor-friendly the company is.
5. Mid-cap and small-cap companies can be future market leaders, so be patient with your investments
Saral Gyan equity analysts have identified 3 Multibagger small cap stocks with promising future in terms of earnings and growth, these 3 small caps have the potential to multiply your investments by 3-5 times in next 3 years.
What else we need? Simply invest in these stocks and hold them tightly for next 3 years to create wealth. We are going to accumulate these 3 small caps in our portfolio and hold them for atleast 3 years to get rewarded in big way. What about you?
Those who wish to invest in small-cap stocks should do so only if they have a long investment horizon and tolerance for volatility. Small-cap stocks suffer the steepest falls in a bear market and rise the most in a bull market. An investor should stay invested for at least three-five years to allow their portfolio to gain from at least one bull run.
Benefits of Investing in Small Caps
1. Huge growth potential: The first and the most important advantage that a small cap stock gives you is their high growth potential. Since these are small companies they have great scope to rise as opposed to already large companies.
2. Low Valuations: Usually small cap stocks are available at lower valuations compared to mid & large caps. Hence, if you invest in good small cap companies at initial stage and wait for couple of years, you will see price appreciation not only because of growth in top line and bottom line but also due to rerating which happens with increase in market capital of the company.
3. Early Entrance Advantage: Most of the fund house and institutions do not own small caps with low market cap due to less liquidity which make it difficult for them to own sufficient no. of shares. This gives retail investors an opportunity to be an early entrant to accumulate such companies shares. When company grows in market cap by delivering consistent growth and becomes more liquid, entry of fund houses and institutions push the share prices up giving maximum gains to early entrants.
4. Under–Researched: Small cap stocks are often given the least attention by the analysts who are more interested in the large companies. Hence, they are often under - recognized and could be under-priced thus giving the investor the opportunity to benefit from these low prices.
5. Emerging Sectors: In a developing economy where there are several new business models and sectors emerging, the opportunity to pick new leaders can be hugely beneficial. Also the disruptive models in the new age is leading to more churn and faster growth amongst the nimble footed smaller companies.
Concerns while Investing in Small Caps
1. Risk: The first and the most important disadvantage a small cap stock is the high level of risk it exposes an investor to. If a small cap company has the potential to rise quickly, it even has the potential to fall. Owing to its small size, it may not be able to sustain itself thereby leading the investor into great loses. After all, the bigger the company, the harder it is for it to fall.
2. Volatility: Small cap stocks are also more volatile as compared to large cap stocks. This is mainly because they have limited reserves against hard times. Also, it in the event of an economic crisis or any change in the company administration could lead to investors dis-investing thereby leading to a fall in prices.
3. Liquidity: Since investing in small cap stocks is mainly a decision depending upon one’s ability to undertake risk, a small cap stock can often become illiquid. Hence, one shouldn’t depend upon them for an important life goal.
4. Lack of information: As opposed to a large cap company, the analysts do not spend enough time studying the small cap companies. Hence, there isn’t enough information available to the investor so that he can study the company and decide about it future prospects.
Saral Gyan team do take care of above concerns by doing indepth research and analysis of small cap companies before releasing Hidden Gems research reports with buy recommendation. Its sincere efforts, dedication and passion of our equity analysts that 10 out of 30 Hidden Gems released by our equity analysts have given more than 100% returns to our members. If you have patience and want to add extra power in your portfolio, start investing some portion of your savings in fundamentally strong small companies - Hidden Gems.
In case of any queries, do contact us.
Regards,
Team – Saral Gyan,
