Smallcaps fall like house of cards, stick to largecaps

Some of the investor’s favorite smallcap stocks are falling like ninepins. At the start of the month, the BSE Smallcap index was just 7 per cent away from striking an all-time high after eight years. But the recent slither in the market, more so in smallcap stocks, showed the limitations in the space.

They are as much riskier as they are more rewarding.

Data showed many of smallcap stocks like Delta Corp, GNFC, Store India One Retail, Sunil Hitech, India Bulls Realty and HDIL have slumped anywhere between 15 per cent and 40 per cent so far this month. Delta Corp share price declined 40% so far this month while GNFC share price, Sunil Hitech share price and Store one share pricetumbled 27%. Also, IndiaBulls real estate share price slipped 16% and HDIL share price tanked 22% so far in November and the month has just begun.

According to the analysts the opportunity in the largecap space is far better than in midcaps and smallcaps. The ongoing dip should be utilized by all investors, whether one is a short-term trader, swing trader or even a long-term investor, to pick up largecap stocks because any recovery will first be witnessed in the largecap stocks than in midcaps or smallcaps.

Smallcap Mania

While global worries have made many largecap stocks, with high institutional exposure, calm down a bit. Smallcaps have never really glanced back ever since their bull phase started in mid-2014.

Some analysts say that while the smallcap basket is the place where future multibaggers are created, it is time to move to largecap stocks. One has to be very stock-specific if one wishes to be in the smallcap space.

They also say that smallcaps and midcaps are more expensive than largecaps in a comparative sense. Last week Nifty midcap index was trading at a 650 bps discount to Nifty50 during August-September 2013. Today, it is trading at 650 bps premium to the Nifty50, even as the standard discount over a 10-15-year period has been about 150 bps.

The only time when the midcap index traded at a premium to the largecap index was when earnings were rising at 30 per cent compounded. There is most likely some point to consider, because even the Nifty50 virtually gets 40-50 per cent of its earnings outside India, where there are challenges. Analysts think that some balancing out that might happen there.

 

 

While experts think a valuation comparison with historic PE averages should not be a measure to buy or sell a stock, others have turned positive on largecap stocks for different reasons after the recent rise.

Largecaps should outperform from here on at the broader level, says experts. The two drivers would be

•  Domestic events such as a pickup in the reforms drive and recovery in earnings and economic growth, and
• Global Developments.

Also, there is a possibility rate hikes by the US Fed and uncertainty in Europe. Those are some of the risks one needs to balance out. Experts say that they would rather be in largecaps than in midcaps or smallcaps.

Journey through Eight Years:

In 2007 a sharp upward move in the BSE Smallcap index fascinated many retail investors to Dalal Street. That was the time when the domestic equity benchmarks were en-route for new highs. A few months after the Sensex peaked in early 2008, the BSE Smallcap index touched its pinnacle in April 2008.

Eight years have passed, and the BSE Sensex has accomplished many milestones, including the 30,000 mark in March 2015. But the smallcap index has never reclaimed its 2008 high.

But the ascend over the past two years since 2014 has raised the index, which was just 7 per cent away from its all-time high level earlier this month.

 

Inherent Risks:

Smallcap stocks have the capability to generate real alpha for a portfolio, but they have related inherent risks, analysts said.

The return profile has an indirect association with the size of a company, meaning that smaller companies offer the potential of higher returns followed by medium-sized companies, while it is the least for largecap companies. Unfortunately, the risk has a corresponding profile to returns, implying that investment in smaller companies is supplemented by highest risk followed by medium sized companies and least for large companies.