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Friday, June 6, 2014

Multibagger Small Cap Stocks & The Retail Investor

When the word "Small Cap" is mentioned in the investor community, lack of interest and confidence is observed which shows the disillusionment that investors have towards this category.

Most of the retail investors keep themselves away from investing in small and little known companies which they never heard of and find themselves comfortable investing in companies which they are aware and keep a close watch on price movement instead of looking at important parameters like recent performance of the company, its quarterly results, debt on books, earning per share, dividend yield, PE ratio, ROE ratio etc along with future prospects considering macro and micro environment for the industry to which stock belongs to.

Small cap stocks offer a lot of potential to generate additional return in your portfolio. Experts and Guru's of stock market should put in extra effort to create more awareness about benefit of investing in small cap stocks during choppy markets. Actually there is a need to calm down the investors during market downturns and advise them on the positives of investing into this category when markets are range bound.

Small Cap stocks are known to deliver impressive performance when bulls rule the markets, but they get battered during a bearish regime. For instance in 2009, Sensex was one of the best performing markets vis-a-vis its peers. This was on account of the positive impact of the stimulus released by the Government and the election results, which led to confidence among investors and corporate India that a stable government at the centre will be able to bring in a lot of reforms. This saw the index posting a superb return of 81% while the BSE Small Cap Index actually delivered an impressive 126% during the same time horizon.

Similarly, if we look at performance of various indices in 2014, Sensex has given returns of 20.1% since 1st Jan'14, however BSE Small Cap Index has given whopping returns of 47% during the same period. Sensex has made all time high and closed at 25,396 today. However, Small Cap Index closed at 9,774 today and is still down by -31.4% from its all time high of 14,239 made on 8th Jan 2008. 

This could be attributed to the fact that during market upturns small cap companies normally outperform their larger peers, since the latter would have already reached their peak in terms of the potential to grow in the future, while the former actually gets to unlock its growth potential as there is a long way for them to reach the maturity stage.

There are a lot of reasons why investors should not directly get into small cap stocks as some of them can be illiquid and concerns may arise about the way the company is being professionally managed. Moreover, these companies have limited media coverage and they are largely unknown among investors, which means the information in public domain will be very limited.

Hence in this scenario, investors who want to invest in small cap stocks should go by advise of professionals who have the expertise to spot these hidden gems. We believe that with BSE Small Cap Index trading at 31% below its all time high, this is the right time to get into small cap stocks. However, this category is recommended only to investors who are ready to take the extra risk to get the additional upside in their portfolio and also have the patience to wait to reap the benefits.

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 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

We always suggest salaried employees as well as businessmen / entrepreneurs to invest via SIP (Systematic Investment Plan) route. Simply get some savings from your monthly income and Invest in equities for long term. SIP not only allows you to save every month in a disciplined way but also help you ride through ups and downs of stock market.

Invest some portion of your monthly income in good companies without  timing the stock market and you will definitely get rewarded in long run.

Just take care of Basic Principle of Investing in Equities:

1. Invest in stock market with a long term view (3 - 7 years or more).
2. Invest in companies which are fundamentally strong with scalable business.
3. Follow disciplined approach by Investing regularly in equities.
4. Build a diversified portfolio by investing in small & mid cap companies.
5. Avoid frequent buying / selling of stocks, Its trading not Investing!
6. Review performance of your holding companies at least once a year to decide whether to buy / sell or hold.

Lets review how SIP approach have benefited our Hidden Gems members during last 3.5 years. Below is the table which illustrates value of Rs. 10,000 invested (every month) in Hidden Gems (Unexplored Multibagger Small Cap Stocks) vis a vis value of Rs. 10,000 invested in BSE Small Cap Index during last 3.5 years.

We are delighted to share that average returns of Saral Gyan Hidden Gems (30 stocks) during last 3.5 years is 126% compared to 34% of BSE Small Cap Index. Investment of Rs. 10,000 in Hidden Gems during last 3.5 years not only allowed you to save Rs. 3 lakh but also appreciated your investment giving overall profit of Rs. 3.78 lakh, making your total Hidden Gems stocks portfolio of Rs. 6.78 lakh. However, if you invested the same amount in Small Cap Index, you would be sitting with overall gains of almost Rs. 1 lakh.

In fact, actual returns of Hidden Gems are much higher as we suggested partial / full profit booking at higher levels in many of our Hidden Gems like Camlin Fine Chemicals, WPIL, De Nora Ltd, Cravatex, SAB TN Ltd etc and exit in few of non performing companies like National Plastic, Sumedha Fiscal, Puneet Resins etc. 11 Hidden Gems out of 30 during last 3.5 years have given more than 100% returns to our members, we are hopeful that we will continue to hunt best Hidden Gems from universe of small caps by doing authentic, in-depth and unbiased research work and support our members to make educated investment decision.

Below are our Hidden Gems (Unexplored Multibagger Small Cap Stocks) which have given returns in the range of 100% to 800% (2 - 9 Bagger Stocks). As we made these reports public, you can access read / download our research reports by clicking on the links:

1. SAB TN >>> Rec. Date: 05 Sep'10 >>> ROI: 129% >>> Read / Download

2. DE NORA >>> Rec. Date: 07 Nov'10 >>> ROI: 87% >>> Read / Download

3. CAMLIN FINE >>> Rec. Date: 27 Mar'11 >>> ROI: 588% >>> Read / Download

4. WIM PLAST >>> Rec. Date: 30 Aug'11 >>> ROI: 369% >>> Read / Download

5. CERA SANITARY >>> Rec. Date: 24 Dec'11 >>> ROI: 783% >>> Read / Download

6. INDAG RUBBER >>> Rec. Date: 29 Jan'12 >>> ROI: 181% >>> Read / Download

7. SUPERHOUSE >>> Rec. Date: 29 Feb'12 >>> ROI: 161% >>> Read / Download

8. MAYUR UNIQ. >>> R. Date: 31 Mar'12 >>> ROI: 559% >>> Read / Download

9. ROTO PUMPS >>> Rec. Date: 5 Aug'12 >>> ROI: 151% >>> Read / Download

10. ACRYSIL >>> Rec. Date: 25 Nov'12 >>> ROI: 150% >>> Read / Download

Through Hidden Gems and Value Picks, we're providing you opportunities to invest in such small / mid caps stocks today. Infosys, Pantaloon, Dabur, Glenmark were the small cap stocks in past and today are the well known companies falling under mid and large cap space.

The stocks we reveal through Hidden Gems & Value Picks are companies that are either under-researched or not covered by other stock brokers and research firms. We keep on updating our subscribers on our past recommendation suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future outlook.

Subscribe to Hidden Gems & Value Picks and start investing systematically. Avail attractive discounts by subscribing to our combo packsclick here for details. On activation of your subscription, you will also receive our special report update - 5 Hidden Gems: 5-Baggers in 5 Years released in Apr'14.

Do contact us in case of any queries, we will be delighted to assist you.

Wish you happy & safe Investing.

Team - Saral Gyan.