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Wednesday, July 21, 2021

How to Explore Multibagger Stocks for Investment?

Below are the 6 Important Steps to Explore Best Stocks for Investment

Step-1: Find out how the company makes money
Step-2: Do a Sector Analysis of the Company
Step-3: Examine the recent & historical performance of the Stock
Step-4: Perform competitive analysis of the firm with its Competitors
Step-5: Read and evaluate company’s Financial statements
Step-6: Buy or Sell

Step-1: Find out how the company makes money

Before you decide to invest in a company’s stock, find out how the company makes money. This is probably the easiest of all the steps. Read company’s annual and quarterly reports, newspapers and business magazines to understand the various revenue streams of the firm. Stock price reflects the firm’s ability to generate consistent or above expectation profits/earnings from its ongoing/core operations. Any income from unrelated activities should not affect the stock price. Investors will pay for its earnings from its core operations, which is its strength and stable operation, and not from unrelated activities. Thus, you need to find out which operations of the firm are generating revenues and profits. If you do not know that you are bound to get a hit in future.

Warren Buffet once said that “if you do not understand how a company makes money, do not buy its stock- you will always end up loosing money”. He never invested even a single penny in technology stocks and yet made billions and billions of dollars both during tech bubble and bust.

Step-2: Do a Sector Analysis of the Company

First is to figure out which sector the stock is in. Then, figure out what all factors affect the performance of the sector. For example, Infosys is in IT services sector, NTPC is in Power sector and DLF is in Real Estate sector. Half of what a stock does is totally dependent on its sector. Simple rule-Good factors help stocks while bad factors hurt stocks.

Let’s take an example of airlines industry. The factors that affect it are fuel prices, growth in air traffic and competition. If fuel prices are high, tickets would be expensive and hence fewer people will fly. This will hurt the airlines sectors and firms equally. This would make the sector less attractive because there would be less scope for growth of the firms.

The idea is to find out the good and bad factors for the sectors and figure out how much they will affect the stock and how. What we are really looking at are reasons that will make stock price good or bad or a company look more or less valuable, even though nothing about the company changes. This will give you a broader view whether the stocks will do well or poorly in the future.

Step-3: Examine the recent & historical performance of the Stock

By performance we mean both operational and financial performance of the company. Take out some time to find out how the company has done in its business over the years. Were there issues with its operations such as labor strike, frequent breakdowns, higher attrition or lagging deadlines? If any company has a history of serious problems, it does not make a good buy because chances are high it may have similar problems again. History is a good predictor of future! It is also extremely important to find out the historical financial performance of the company – growth in revenues, profits (earnings), profit margins, stock price movements etc.

Step-4: Perform competitive analysis of the firm with its Competitors

This is most important step in analyzing a stock. Unfortunately, most of the retail investors do not bother to do this. It takes time to do this step but it worth trying if you don’t want to loose your money. Many investors buy a stock because they have heard about the company or used the products or think companies have excellent technologies. However, if you do not evaluate or compare those features of the company with other similar firms, how will you figure out whether the firm is utilizing them effectively or is better/worse than others? We also need to find out whether company is growing rapidly or slowly or has no growth. We would like to cover couple of financial ratios here in brief and explain how to use them to figure out a good stock.

P/E: Price-to-earnings ratio is the most widely used ratio in stock valuation. It means how much investors are paying more for each unit of income. It is calculated as Market Price of Stock / Earnings per share. A stock with a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks. However, P/E alone may not tell you the whole story as you see it varies from one company to another because of different growth rates. Hence, another ratio, PEG (P/E divided by Earnings Growth rate) gives a better comparative understanding of the stock.

PEG = Stocks P/E / Growth Rate
We do not want to go into the calculation part as values for P/E are available on internet for most of the companies.
A PEG of less than 1 makes an excellent buy if the company is fundamentally strong. If it is above 2, it is a sell. If PEG for all the stocks are not very different, one with lowest P/E value would be a great BUY.

Step-5: Read and evaluate company’s Financial statements

This is the most difficult part of this process. It is generally used by sophisticated finance professionals, mostly fund managers who can understand different financial statements. However, there are few things that even you should keep in mind. There are three different financial statement- balance sheet, income statement and cash flow statement. You should focus only on balance sheet and cash flow statement.

Balance Sheet: It summarizes a company’s assets, liabilities (debt) and shareholders’ equity at a specific point in time. A typical Indian firm’s balance sheet has following line items:

• Gross block
• Capital work in progress
• Investments
• Inventory
• Other current assets
• Equity Share capital
• Reserves
• Total debt

Gross block: Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset.

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset is worth to the company.

Capital work in progress: Capital work in progress sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

Investments: If the company has made some investments out of its free cash, it is recorded under it.

Inventory: Inventory is the stock of goods that a company has at any point of time.

Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company.

Other current assets: Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital: Equity Share capital is the owner\'s equity. It is the most permanent source of finance for the company.

Reserves: Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt: Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

One need to ask-How much debt does the company have? How much debt does it have the current year? Find out debt to equity ratio. If this ratio is greater than 2, the company has a high risk of default on the interest payments. Also, find out whether the firm is generating enough cash to pay for its working capital or debt. If total liabilities are greater than total assets, sell the stock as the firm is heading for disaster. This debt to equity ratio is extremely important for a company to survive in bad economy. What is happening now-a-days should make this extremely important. Companies having higher debt ratio have got hammered in the stock market. Look at real estate companies- their stocks are down by almost 90% from all time highs made in 2007 - 2008. This is because they have high debt level which means higher interest payments. In case of liquidity crisis and global slowdown, it would be extremely difficult for such companies to survive. Remember, a weak balance sheet makes a company vulnerable to bankruptcy!

Step-6: Buy or Sell

Follow all the steps from 1 to 5 religiously. It will take time but worth doing it. If you do it, you won’t have to see a situation where you loose more than 50% of stock value in a week! Buying or selling will depend on how your stock(s) perform on the above analysis.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Wednesday, November 11, 2020

How to Calculate CAGR of your Investments?

Dear Reader,

This article will let you know how to calculate the compound annual growth rate, or CAGR, in Excel. You’ll also learn about some of the limitations.

Note: You can download our excel file to calculate CAGR returns, click on download link available at bottom of the article.

Different investments go up or down in value by different amounts over different time periods. Investors need a method of comparing one investment against another, especially if the returns have been volatile, or if investments and withdrawals are at irregular dates.

CAGR is the annual return of an investment assuming it has grown at the same rate every year. It’s a common concept; for example, the one, three and five-year returns on mutual fund fact sheets are CAGR values.

One method of calculating CAGR is given by this equation.

 There are three parameters in this equation.
  • start value of the investment
  • end value of the investment
  • number of years between the start and end value
You can also manipulate this formula to give, for example, the number of years required to grow an initial investment from a start value to an end value, given the growth rate..

Below tables use the above formulas to calculate CAGR.


You can also rearranges the formula so you can calculate the final amount (given the initial amount, CAGR, and number of years) and the number of years (given the initial and final amount, and CAGR).

You can also calculate the Compound Annual Growth Rate using Excel’s XIRR function – check out the screen below for an example.
 

XIRR takes three arguments:
  • The first is a range of cash flows into or out of the investment. Invested amounts are positive, but withdrawals are negative.
  • The second is a range of dates corresponding to the investments or withdrawals,
  • The third is a guess value for the CAGR (XIRR uses Newton-Raphson iteration, so it needs a guess value tostart the iteration).
XIRR is flexible, and can also given you the CAGR given investments and withdrawals at irregular dates. As an example, examine the screen of the Excel spreadsheet.

CAGR has some limitations that investors need to be aware of:
  • CAGR hides volatility by assuming that investments grow at a constant rate. Volatility is an important factor in managing investment risk and can’t be ignored.
  • It’s based on historical data, and can’t be relied on as the only method of predicting future value.
  • CAGR can be manipulated by picking the time period over which it is measured. An unscrupulous fund manager can, for example, choose a start date with an unusually low investment value.
You can download our excel file which contains examples demonstrated in this article and can use the same to find out CAGR of your investments.

CAGR Calculator excel file - Download

Note: You’ll need to enable the Analysis Toolpack to use the XIRR function.

Regards,
Team - Saral Gyan

Thursday, September 10, 2020

Check Fundamentals & Not Share Price while Buying Stocks

Dear Reader,

Why is a stock that cost Rs. 50 cheaper than another stock priced at Rs. 10?

This question opens a point that often confuses beginning investors: The per-share price of a stock is thought to convey some sense of value relative to other stocks. Nothing could be farther from the truth.

In fact, except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.

The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. For that number, we need the market capitalization or market cap number.

The market cap is found by multiplying the per-share price times the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.

Here’s an example:

Stock price: Rs. 50

Outstanding shares: 5 Crores 

Market cap: Rs. 50 x 50,000,000 = Rs. 250 Crores

To prove our opening sentence, look at this second example:

Stock price: Rs. 10

Outstanding shares: 30 Crores 

Market cap: Rs. 10 x 300,000,000 = Rs. 300 Crores

This is how you should look at these two companies for evaluation purposes. Their per-share prices tell you nothing by themselves.

What does market cap tell you?

First, it gives you a starting place for evaluation. When looking a stock, it should always be in a context. How does the company compare to others of a similar size in the same industry?

The market generally classifies stocks into three categories:

• Small Cap under Rs. 1000 Crores 

• Mid Cap Rs. 1000 - Rs. 10000 Crores

• Large Cap above Rs. 10000 Crores

Some analysts use different numbers and others add micro caps and mega caps, however the important point is to understand the value of comparing companies of similar size during your evaluation. You will also use market cap in your screens when looking for a certain size company to balance your portfolio. Don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn't tell you much. Focus instead on the market cap to get a picture of the company’s value in the market place.

IMP Note: This article is written to safe-guard our readers who are new to stock market, and make them understand about the actual facts. We keep on receiving mails from our readers regarding the price range of stocks we covers under our Hidden Gems or Value Picks service. The misconception in mind of new investors is regarding the stock price, majority of them believe that if stock price is less, like below Rs. 50 or even below Rs. 10, changes of stock price appreciation is very high and they can buy more no. of shares rather than buying a limited no. of shares of high priced stock. 

We started Hidden Gems annual subscription in late 2010 followed by other services like Value Picks, 15% @ 90 Days and Wealth-Builder, today we have a strong subscriber base covering almost all major states in India and from 20 other countries across globe. During the last 8 years we have interacted with several investors seeking multibagger return from stocks. 

It was 17th Dec 2011, we recommended Cera Sanitaryware as Hidden Gem stock of the month at price of Rs 157, later it went up to Rs. 450 in period of 15 months. Based on strong quarterly numbers, attractive valuations and consistent performance, we recommended buy again in the range of 400-450 which was taken as a surprise by our members as we received several queries and feedback.

Below are some of the common queries of our subscribers which often lead them to opportunity losses.

1. How come a stock priced at Rs 450 can generate Multibagger returns?
2. Cera is almost 3 times moving from 170 to 450, why are you suggesting buy again?
3. Where is the room to generate Multibagger return from this level?
4. I don’t like such high-priced stock, please give me stocks priced below Rs. 100.
5. I want to buy more no. of shares, hence please recommend low price stocks below Rs. 10.

Cera Sanitaryware touched its life time high of Rs 3918 in January 2018, post severe correction in small and mid cap stocks over last 15 months, stock is down by -28% and is at Rs. 2809 today. Even after such a correction in stock price, Cera Sanitaryware is a 18-Bagger stock giving as on date returns of 1690% in 7 years from our initial recommendation and 525% return from our reiterated buy at Rs. 450, which was not liked by our subscribers.

The story does not end here, there is a long way to go. Our suggested stocks is with a view-point of 1-3 years at least and not just 6-9 months. If fundamentals of the company are intact, we would not suggest our members to do profit booking or exit. Investors who stayed away just because of high price simply missed yet another opportunity. We continuously recommended Cera during last couple of years to our members at much higher levels.

There is a general misconception among the investors that high priced stocks can't generate multibagger returns. They often think that high-priced stocks are overvalued. In terms of valuation, a 50 rupees stock may not be cheaper than that of a 1000 rupees stock. There is no co-relation between the valuation and market price of a stock. To understand whether a company is small or large, you must look at market capital of the company and not at stock price. To judge valuation you must have to look at Price to earning ratio, Price to book ratio, Price to sales ratio etc.

Lets try to understand this with an example, Tide Water Oil share price was Rs. 1450 on 1st Jan'12 (stock split and bonus issue adjusted price, actual price was 5800). Today the stock price is at Rs. 5051 giving absolute returns of 248% i.e. 3.5 times in 7 years against double digit return of Sensex in the same period. We suggested Buy on Tide Water Oil and many of our subscribers might not have invested in it thinking that they can buy hardly 2 shares by investing Rs. 12,000 but now those 2 shares are actually 8 shares post stock split and issue of bonus share and share price is near the recommended price.

There are many examples like above by which we can illustrate that there’s nothing called high price. Multibagger returns is not dependent on the current market price of a stock, so don't be afraid of investing in high priced stock. You need to look at fundamentals like future growth prospects of the company, PE ratio, PB ratio, ROE, ROCE, debt on books, cash reserves along with other parameters to judge a stock whether it is undervalued or overvalued. We agree with you that judging valuation is not an easy task. So, take expert’s advise when ever required.

Another misconception among investors is to buy more no. of shares. They often think that its better to buy more no. of shares of a low price scrip (ranging below Rs. 10 or say below Rs. 50) instead of buying less no. of shares of high priced stocks. They often think that low price stocks can generate multibagger return quickly. During last 5 years, we have reviewed existing portfolio of our members under our Wealth-Builder (an offline portfolio management service) subscription, we have noticed that many of their portfolio is filled with such low-priced stocks and most of those are in great loss because of poor fundamentals. You may think that a two rupees stock can easily generate multibagger returns even if it touch to Rs. 5 or 6. At the same time don’t forget that the same can even come down to Rs. 0 levels which can evaporate all your investment giving you 100% loss! In terms of valuation a two thousand rupees stock may not be expensive than that of a two rupees stock.

Lets try to understand this also with a simple example, Lanco Infratech was a well-known company from Infrastructure sector. At the beginning of 2010 the stock was around Rs 55. Now it is hovering at just Rs 0.42 and trading is suspended in the stock. Those who purchased the stock during 2010 are in 99% loss! Rs. 1 lakh invested in Lanco Infratech in Jan 2010 is valued at merely Rs. 1,000 today, a complete wealth-destroyer! Isn't it? Those who bought this stock at levels of Rs. 30 and later again at Rs. 10 or Rs. 5 to average out thinking that stock has came down from all time highs of Rs. 85 are still waiting to get their buying price back. There are many such stocks like Suzlon Energy, GMR Infra, GVK Power and Infrastructure etc which have continuously destroyed wealth of investors over a period of last 6 to 9 years.

We do not state that all low price stocks are wealth-destroyers, it all depends on the fundamentals of the company. So, do ensure that you check out the fundamentals and valuations while investing in stocks instead of looking at stock price. Please get out of the misconception that low priced stocks will fly high faster giving you extra-ordinary returns. Always remember that stock price is just a barometer, actual valuations of a company can be determined by its fundamentals.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Thursday, May 7, 2020

Know Your Risk Tolerance Before Investing in Equities

Dear Reader,

Stock prices were on rise till Jan'18 with significant increase in retail investors participation during last couple of years. As many new investors get into stock market during such times, its always important for an individual investor to understand what is his/her investment profile and risk tolerance.

In 2018, with lot of pessimism building around equity market due to global factors, deteriorating of domestic macros with rise in crude oil prices, weakening rupee and liquidity crisis with IL&FS default, we have seen severe correction in broader market with Mid & Small Cap Index falling by more than 24% and 33% respectively from all times high made in January this year. Stock prices of many mid and small cap companies have seen a steep fall in the range of 30% to 60% or even more from highs made in beginning of this year. In such situation every investor looking to create wealth is confused whether to exit, hold or enter the stocks and at what levels to enter or exit.

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. Its important to know, whether you would be able to hold on your positions in case stock market tanks? However, such severe corrections do not come very often and hence must be considered as buying opportunity to aggressively add on good quality stocks at discounted prices keeping a long term view. If you are a long term investor, its wise to be greedy when others are fearful.

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.

We strongly recommend our members (who are new to stock market) to kindly go through our Asset Allocation Questionnaire to understand your investment profile and risk tolerance.

By answering 15 questions about your risk preferences, you can find out your investment profile and risk tolerance. This score will determine the asset allocation that best suits your risk preferences, you can use our simple excel workbook - Saral Gyan Asset Allocation Questionnaire which suggests the optimum split between cash, bonds and stocks.

The questions are simple to answer, with options provided to select answers using drop-down list, check boxes and radio buttons. They are designed to determine your tolerance to investment volatility, the size of your existing financial cushion, your time horizon, and what you want your investment to achieve.


Saral Gyan Investment Risk Profile & Asset Allocation workbook - Download

The questions asked in the excel workbook includes:

1.What is your total annual income before tax (including investment dividends but not including employment bonuses)?
2.How many sources of income do you have?
3.What is the value of your liquid (or investable assets)? This includes cash plus any easily sold investments like Gold, Bonds and Stocks.
4.What yearly income do you want from this investment portfolio?
5.How long do you intend to hold this investment portfolio?
6.What would you do if your investment portfolio fell in value by one-fifth (20%) over the course of 12 months?
7.What characteristics would you prefer your investments to have?
8.Do you prefer investments which have low volatility and low return, or investments which have high volatility and high returns?
9.What do you want this investment portfolio to do? Preserve capital, generate income, generate income with some capital appreciation etc.
10.What volatility (or risk) are you prepared to tolerate?
11.In the next five years, what percentage (if any) of the portfolio do you plant to sell to realize cash?
12.What kind of investments do you currently own, or would prefer to own? Domestic, international, aggressive, fixed income etc.
13.Assuming a time horizon of ten years, what annual return do you want?
14.Who do you normally get investment advice from?
15.How would you rate your current skill in managing investments?

Your answer to each question is rated with a score. The total score is used to suggest an asset allocation that is appropriate to your risk preferences; the workbook suggests a split between:

■ Cash
■ Bonds (high-yield, long-term, intermediate and international)
■ Stocks (large cap, mid cap, small cap and micro cap stocks)

You can also find out what kind of investor you’re considered; an income investor, a long term investor, an aggressive, moderate or conservative investor. Really helpful, do it yourself.


IMP Note: As our excel workbook is macro enabled file, do enable the macro's while using the file. If you do not understand macro's, do not worry. once you open the file, excel automatically ask you whether you want to enable or disable macro's, simply click on enable and proceed.

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.   

Time has shown that smart investors have made their fortune by investing in equities in long term. None other asset class can match giving you such extra ordinary returns. Yes, its important for you to invest in right set of companies at right price with medium to long term perspective. If you think to invest in stocks for period of 3 months or 6 months, we suggest you to stay out of stock market because you are not investing, you are betting on volatility of stock market which could be risky.Wish you happy & safe investing!

Regards,
Team - Saral Gyan. 

Thursday, October 31, 2019

Will History Repeat Itself in 2019 for BSE Small Cap Index?

Dear Reader,

The BSE small cap index is still down by 32.8% from its peak made in January 2018. The liquidity crisis in NBFCs, the DHFL and IL&FS defaults, collapse in stock price of Yes Bank, lenders dumping stocks of debt laden companies, layoffs in automobile sector with production cuts, and GDP growth slipping to 6 years low of 5% in June quarter have dampened investors sentiments towards broader market. Fear and misinformation has shattered investor’s confidence and hence quality businesses are back to cheap valuations.

There is lot of hopelessness with least participation by investors in small and mid caps in 2019.  The reason is the carnage in stock prices of many well-known companies. 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. You may argue that most of small and mid caps have wiped out your hard earned gains over last couple of years. In fact those who invested in small caps over last 2 years are sitting on significantly higher losses and may be thinking to stay away from them.


But we beg to differ. We firmly believe that these are the opportune times to invest in broader markets instead of large caps. During bear phase in broader markets, negative sentiments around small and mid caps have brought down excellent businesses down to historically low valuations, there are companies which have not seen any change in business fundamentals, continue to grow during these tough times but are now available at decade low valuations. 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.  When overall market sentiments are negative like we are witnessing now due to various reasons along with slowdown in economy, 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.

Moreover, the bold decisions and corrective measures taken by the Government recently must augur well to get economic growth back on track sooner than later. Last month, FM Nirmala Sitharaman announced a historic reform by reducing tax for Corporate India. Government slashes tax on domestic businesses to one of the lowest rates in Asia, providing a more than USD 20 billion boost to revive economic growth from a six-year low. Effective from April 1, 2019, tax on all domestic companies will be lowered to 22% from a base rate of 30% currently. The effective new rate will be 25.17% including all additional levies.

Earlier, the Govt had reduced effective tax rates on companies with turnover up to 400 crores to 29.12%, now those companies will also be taxed at 25.17%. The new tax structure for new companies formed from 1 Oct 2019 will attract a base tax rate of 15% and effective rate of 17.01%.


India now has amongst the most competitive tax rates in the region. At an effective rate of just over 25 percent inclusive of all levies, businesses in India need not find ways to reduce or evade their tax burden. With more money in hand, Indian firms can choose to further invest in business growth doing capex or can reduce their product prices to boost sales or reward employees giving higher pay cheques. All these moves will eventually have positive economic impact. New manufacturing companies enjoying a tax-friendly entry is definitely a big positive for "Make in India" initiative, an effort to boost productivity-oriented jobs for lower-skilled Indians.


Slashing corporate tax rate will invite big global manufacturing companies to India as well as encourage Indian companies to expand their operations. Indian Government has not only gave a super dose of steroid to revive weak economic growth but also rolled out red carpet for global companies to invest in India, make in India and grow & prosper with India.


Will History Repeat Itself in 2019 for BSE Small Cap Index?

Looking at past performance, BSE Small Cap Index has never delivered negative returns for 2 consecutive years in past. Small cap index was down by -23.4% in 2018, and as on date it is down by another -8.2%. BSE Small Cap Index which was at 14,767 on 1st Jan 2019 closed at 13,558 today.

BSE Small Cap Index YoY Returns
Now if history has to repeat itself, BSE Small Cap Index has to close well above 14,767 by end of this year. It means minimum upside of 9% from current levels. Looking at dirt cheap valuations of small caps at current juncture and change in sentiments with Government announcing major reform i.e. cut in corporate tax, we believe it is very much possible. And in case if history fails to repeat itself in these 2 months, it will not disappoint long term investors who are accumulating fundamentally strong small and mid size companies at current levels.

More importantly, we are not just looking for recovery, we firmly believe that lot of wealth will be created from small and mid size companies which are doing all the right things without any change in business fundamentals but witnessed crash in stock prices just due pessimism in markets. Over next 2 to 4 years, the same set of companies not only recover their lost ground but also turned out to be multibaggers for long term investors.


In past, BSE Small Cap Index went up by 69% in 2014 and during the same year numerous small and mid cap stocks turned multi-bagger delivering mind boggling returns. These returns were enjoyed mostly by those who held on to their stocks during painful years like 2011 and 2013. BSE Small Cap Index rallied by 58% in 2017 when we witnessed lot of retail participation in broader markets and most of small and mid caps were expensively valued, later 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.


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. 

Do not stop investing in small caps looking at these turbulent times, its time to do the opposite, this phase has happened before and small and mid caps have always bounced back. Good sentiments as well as bad sentiments do not last forever.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan