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Wednesday, June 8, 2016

Are you Investing in Potential Multibagger Small Cap Stocks?

Dear Reader,

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.

There are a lot of reasons why investors 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.

However, at this juncture, we would like to differ from the general view and recommend risk taking investors not to follow the herd but rather they can consider taking a small exposure into the small cap stocks.

We always suggest our members not to time the market and follow a disciplinary approach while investing in equities with medium to long term perspective. Historical data indicates that most of the new investors get fascinated towards stock market to make quick bucks and finally end up loosing their capital as they cant hold on their stocks in case market corrects and sell out their stocks in a panic. Stock market is not a money making machine, you need not to be greedy on rising market or fearful when stock market falls, simply buy right and sit tight having sufficient patience with you to see your investment growing over a period of time.

Few Multibagger Small Cap Stocks

Century Plyboards is a leading player in the fast growing plywood and laminate segment, with an overall share of 25 per cent of the organised plywood market, which is estimated at Rs 4,500-4,800 crore. The organised plywood and laminate segment is growing at healthy double digits due to an improving demand environment and a shift towards branded products. As per our estimates, it can grow ahead of the industry, at 22% CAGR, over the next three to five years. 

Inspite of poor state of construction sector, Century managed to post reasonably better set of numbers in last financial year. Century Plyboards net profit rose 11.44% to Rs 168.07 crore in the year ended March 2016 as against Rs 150.82 crore during the previous year ended March 2015. Sales rose 6.08% to Rs 1646.86 crore in the year ended March 2016 as against Rs 1552.47 crore during the previous year ended March 2015. 
Century Plyboards is a high-quality consumer play with a dominant market share and any improvement in demand will augur well for the company.

You might be surprised to know the fact that Century Plyboards was one of the star performer - multibagger stock of 2014, a 9-Bagger stock rising about 800 percent in just 12 months. Those who entered in the stock before fund managers started accumulating it in big chunk may have a 50-Bagger stock in next 3 to 5 years as still there is lot of scope for business growth during next couple of years.

Lets take another example of little known company Mayur Uniquoters which is our 7-Bagger stock. We recommended this stock 4 years back at price of Rs. 56 (adjusted price after 2 bonus issues and stock split in last 3 years, actual recommended price was Rs. 448) and today it’s at Rs. 405 giving absolute returns of 624%. You might be surprised to know that Mayur Uniquoter is a 135-Bagger stock for investors who invested in it 7 years back. Investment of Rs. 1 lakh in Mayur Uniquoters in Jan 2009 is valued at Rs. 1 Crores and 35 lakhs today. That's too excluding dividend payouts. 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 1,870 crores.

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 and Value Picks is an ideal choice for you.

It’s a fact that 33 Hidden Gems out of 52 released by our equity analysts in last 5 years (till Dec'15) 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

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 33 out of 52 Hidden Gems released by us during last 5 years (till Dec'15) have given more than 100% returns to our members. In fact 23 out of these 33 stocks have given returns in the range of 200% to 1900%.

Below is the performance update of Hidden Gems stocks released in 2014 compared to returns given by small cap index:
We are pleased to share with our readers that 7 Hidden Gems out of 12 released in 2014 have already achieved their target price giving more than 100% returns to our members in period of 6 to 12 months. Hidden Gems stocks - 2014 average returns as on date is 101.8% compared to small cap index average returns of 25.3%, hence outperforming small cap index by whopping 76.6%.

Similarly, if we look at performance of Hidden Gems stocks released in 2015, we are glad to share that our Hidden Gems stocks continue to outperform small cap index by wide percentage points.
Hidden Gems - 2015 as on date average returns is 28.6% compared to small cap index average returns of  1.1% in 2015, outperforming small cap index by 27.5%.

If you have patience and want to add extra power in your portfolio, start investing some portion of your savings in fundamentally strong small and mid cap companies - Hidden Gems & Value Picks.

The stocks we reveal through Hidden Gems & Value Picks are companies that either under-researched or not covered by other stock brokers and research firms. We keep on updating our members 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.

Also Read: Grab our eBook - How to Grow your Savings for Free!

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

Wish you happy & safe Investing.

Team - Saral Gyan