BIG TRIGGERS FOR SMALL- CAPS
Dalal Street Investment Journal|September 28, 2020
BIG TRIGGERS FOR SMALL- CAPS
The year 2020 has been a great one for those investors who have shown a preference for broader markets. The overwhelming performance of small-caps aided by SEBI’s guidance of reshuffling of multi-cap mutual funds has triggered interest in small-caps afresh. Geyatee Deshpande analyses the performance of small-caps while Yogesh Supekar shares why it makes sense to allocate more capital to small-caps in the current environment
Yogesh Supekar

Fantastic is how the small-caps performance has been in 2020. Actually, the overall markets, including the large-caps, have shown tremendous recovery this year. The Sensex is up by 33 per cent since the March lows. BSE Mid-Cap index and BSE Small-Cap index are up by 35 percent and 40 per cent since their March lows. There has been a visible outperformance in mid-caps and small-caps in the past few months. And if the recent outperformance in small-caps is not exciting enough for investors, bulls have been provided additional fodder in the form of SEBI’s diktat to the mutual fund industry to increase allocation to mid-caps and small-caps in the multi-cap mutual fund category.

This announcement by SEBI is expected to create fresh liquidity of about ₹40,000 crore for mid-caps and small-caps. In fact, small-caps are expected to get a lion’s share of this fresh allocation as they have low allocations in multi-cap funds at this point of time. The positive sentiment in small-caps is expected to cheer up retail investors big time. Retail investors usually show preference towards small-caps on account of the perception that small-cap stocks generate large returns in quick time. Says Sagar Punjabi who has been investing in markets since 2000, “In my demat account I purchase only small-cap and mid-cap stocks. At times I take position in micro-cap companies for aggressive returns.”

“For large-cap exposure I prefer ETFs and large-cap mutual funds. With the new SEBI ruling, I am as excited as anyone and am planning to increase my overall allocation to small-cap stocks. The best part about small-cap investing is aggressive returns in less time. There is a very good chance of bagging a multi-bagger when you invest in small-caps. I haven’t had that multi-bagger experience of investing in large-caps yet. Largecaps are good for stability and diversification but small-caps are essential for fast and high returns on a consistent basis,” he adds.

“After two to three bad years for small-caps the new Bull Run in small-cap IT and pharmaceutical stocks is going to be exciting. The outperformance is there for everyone to see in small-caps. I hope to make the most of the rally,” he further states. However, while there is no doubt that the small-caps’ recent performance has been superlative, investors need to be cautious while picking small-cap stocks in the portfolio. They would have to identify the sweet spot within the small-cap space. Right now this spot can be found in certain sectors and in those small companies that are showing consistency in earnings’ growth.

Sectors Showing

Momentum As the momentum is in favour of small-cap stocks we see that several of them are hitting their respective 52-week highs. As expected, most of the small-cap stocks that are scaling new highs come from healthcare, IT and chemical sectors. This just goes to highlight the secular rally in these sectors. Following is the list of stocks from these three sectors that are trading within a 10 per cent range from its 52-week highs.

Overall, out of 680 small-cap stocks that are constituents of the BSE Small-Cap index we find that almost 130 stocks have touched their respective 52-week highs. This means that almost 20 per cent of the BSE Small-Cap index constituents are making new highs in the current market conditions. Out of these 130 stocks, nearly 19 per cent or 25 stocks belong to the healthcare sector within the small-cap space and are within 10 per cent of their respective 52-week highs. Stocks of small-cap IT companies comprise 16 per cent of the total 130 stocks that are trading near their 52-week highs.

In total there are 21 stocks from the IT sector that are within the 10 percent of their 52-week highs while as many as 19 smallcap companies from the chemical sector that are constituents of the BSE Small-Cap index are trading near their respective 52-week highs. It is not that the momentum is picking up only for the small-caps. It is also strengthening for the large-caps as well. The table below highlights the number of stocks that touched their respective 52-week highs since the beginning of the year, month-wise.

What is worth noting is that the markets have recovered from the ‘corona dip’ and the number of stocks hitting their respective 52-week highs is almost similar to that of the pre-pandemic levels, across market capitalisation. Also, worth noticing is the fact that the number of small-caps trending high is significantly higher than that of large-caps and mid-caps. This could be because of the higher number of stocks available in the basket; nevertheless, the higher number of stocks making new highs highlights the importance of tracking small-caps closely.

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September 28, 2020