Over 20 smallcap stocks have managed to deliver a double-digit return to investors in the last 1 month despite weak market sentiment amid monetary tightening, rising inflation and overall growth concerns.
This comes even after the smallcap index underperformed the benchmarks in this period, falling over 9 percent as against a 5 percent fall in the benchmarks.
Most experts believe that rising inflation, a surprise rate hike by the Reserve Bank of India (RBI), sustained selling by foreign investors and mixed quarterly earnings have resulted in the recent decline in the markets. However, even though smallcap stocks are riskier than largecaps and midcaps, experts believe that the correction could be a great opportunity to accumulate quality smallcap stocks at cheaper valuations.
Among stocks, Chennai Petroleum Corporation has risen the most among small-caps, surging 48 percent amid market volatility on the back of rising fuel prices. In the last 1 year, the stock has more than doubled investor wealth, rising over 165 percent. In the month of May, it has added 22 percent.
MRPL is the second name on the top smallcap performer list, rising 36 percent in the past 1 month. The firm manufactures and sells refined petroleum products in India. It has risen 71 percent in the last 1 year and 25 percent in May.
HBL Power System has rallied 34 percent in the last 1 month, making it the third top performing smallcap stock in this period. The firm is engaged in the business of manufacturing batteries. In the last 1 year, it has advanced 115 percent but has been flat in the month of May.
Meanwhile, TD Power Systems, Gokul Agro, Vadilal, Gokaldas Exports, WPIL and Welspun Corp has jumped between 20-30 percent in the last 1 month. Other stocks that gave double-digit returns include Nav Bharat Ventures, Marathon Nextgen, GE Shipping, Omaxe, NOCIL, GHCL, Coromandel International, Apollo Tyres, Orient Bell, JK Laxmi Cement, Navkar Corp, Bombay burmah and Eary Trip Planners, up over 10 percent each.
Experts believe that it is advisable to invest in the stock of companies that has limited liability, which can be evaluated with the debt-to-equity ratio. A higher debt-to-ratio connotes more leverage in a company and such stocks should generally be avoided.
According to Sushant Bhansali, CEO, Ambit Asset Management, the best time to invest in quality companies whether it's the large, mid or small-cap is when market sentiment is negative.
"Quality will last for a long time. Long-term consistency beats short-term volatility. We are witnessing valuations for many companies with strong moats reaching reasonable levels. The earlier you get into a quality company the more time you get to benefit from the power of compounding," he added.
Bhansali further suggested that mid and small companies which offer a higher earnings growth trajectory compared to large companies can thereby significantly create more wealth over long periods of time.
"However one needs to be cognizant of their risk appetite as the ride is much longer and more volatile than large companies which have the benefit of investor confidence for a long period of time. A disciplined approach to investing in good quality companies over the next few months can be a good strategy to make the most of the lower investor appetite for mid and small-cap companies during a tough macro environment," he advised.
Meanwhile, Roop Bhootra – CEO, Investment Services at Anand Rathi believes that most part of the downside has been done and good stocks with improving business prospects and low leverage should outperform whether they are large or small caps.
He added that while mid and small caps stocks provide greater outperformance than large caps, one should have exposure in both large and mid-small caps stocks with proper balance according to their risk appetite.