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Friday, August 22, 2014

Power your Portfolio by Investing in Multibagger Small Caps

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 22nd Aug'14 the stock price is trading at Rs 202.50 and the company's market cap is Rs 12,690 crore. Rs 1 lakh invested Crompton Greaves in Jan 2002 is worth Rs. 1 Crores and 10 lakh today. 

It has been one of the wealth creators in the Indian stock market which has given almost 50 percent annualized return to investors over the last 12 years.

Lets take another example of little known company Mayur Uniquoters which is our 7-Bagger stock. We recommended this stock 2 years back at price of Rs. 56 (adjusted price after 2 bonus issues and stock split in last 2 years, actual recommended price was Rs. 448) and today it’s at Rs. 415 giving absolute returns of 641%. You might be surprised to know that Mayur Uniquoter is a 130-Bagger stock for investors who invested in it 5 years back. Investment of Rs. 1 lakh in Mayur Uniquoters in Jan 2009 is valued at Rs. 1 Crores and 30 lakhs today. Mind boggling, isn't it? It's a fact! Company has posted strong growth YoY and rewarded share holders in big way, Company was trading at Rs. 3 (bonus / split adjusted price) with market cap of merely 13 crores in Jan 2009, today market cap of the company is 1,825 crores and company has paid total dividend of Rs. 9.25 during 2013 which is 3 times of its share price in 2009. 


Mayur Uniquoters is still a great value stock considering its consistent performance and leadership position in artificial leather industry and robust demand for its products by esteemed clients from auto and footwear industry.

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.

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.

It’s a fact that 16 Hidden Gems out of 30 released by our equity analysts in last 3 years (till June'13) have given more than 100% returns.

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 (conservative view) in next 3 to 5 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 at least 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 should not 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 in-depth 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 16 out of 30 Hidden Gems released by us 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

To know more about our subscription services and discounts available on our combo packs, click here. In case of any queries, do write to us.

Regards,

Team – Saral Gyan,
Saral Gyan Capital Services.