Selecting Micro-Cap Companies With Potential

Micro-cap investing and growth investing are considered synonymous in the sense that investors turn to micro-cap stocks because small companies are considered to have greater growth potential. Yogesh Supekar explains the various ways to identify micro-caps with potential

- Yogesh Supekar

Whenever the broader markets rally, we find that the investor portfolio tends to outperform the key benchmark index. It is because investors usually include several stocks from the broader markets in the W portfolio. The lure for micro-cap investing and small-cap investing is the high growth potential in the stock prices when compared to the large-caps and mid-caps. However, we know by now that the market is not all about returns but it is almost always about the risk and returns trade-off.

Says Hitesh Oberoi, who has been focusing on micro-cap and SME stocks for beating markets: "When you invest in equity markets, you must be prepared mentally for a temporary drawdown. It is always painful to see your portfolio in the red. It is more of a psychological risk than anything. It is true that micro-cap stocks usually tend to have higher drawdowns than their mid-cap and large-cap peers but the upside potential in quality stocks more than compensates for the risks if the stock you have invested in is a quality stock. If a micro-cap stock lacks fundamentals and has a poor business model, the chances of it bouncing back are very rare even when the markets recover"

"In my portfolio, where maximum concentration is on micro-cap stocks, I pick stocks with outstanding results and those which are trading near their 52-week high. I usually invest not more than 5 per cent of my portfolio capital in any single bet. However, whenever I find a promoter with vision and with the capability to execute a pre-defined business strategy, I tend to bet heavy. A micro-cap company with consistently outstanding results, scalable business model, operating in the right growth sector, attractive valuations and led by a visionary promoter is a sure-shot recipe for multi-bagger returns given the market conditions are conducive and not corrective," he adds.