Is it worth investing in small caps

Mudit.Kushalvardhan · March 17, 2023, 4:39pm

It sounds too much of a work and continuous tracking. In small cap segment, personally i prefer small cap mutual funds like sbi small cap and nippon small cap. While in case of midcap, i prefer Midcap 150 index fund.

Surender · March 17, 2023, 7:01pm

Author seems to be mining for nothing. Started with universe of 600+, applied 5 filters and reduced the list to 10 names. At the end, provided list of items under ‘Qualitative Checks’ that one should consider. If applied these as well, I am sure that ‘nothing’ will be left to consider for investment.

IMO, sub-standard write-up and that too under premium membership.

Souresh_Pal · March 18, 2023, 3:25am

Investing in small caps without the knowledge of technical analysis is very lethal in low liquidity market like this. Irrespective of good fundamentals if your timing of purchase is wrong you can be in deep loss for 2-3 years. Many good small caps started their downway path from 2018 only to end in covid crash and then started to go up only to top at 2018 price top. If u have the knowledge of stage analysis you can save yourself from this.

meekinvestor · March 18, 2023, 4:48am

We are all learning. At least I am. We will be grateful if you expand on your comments to show us which criterion/criteria the author has ignored.

To me, the small caps appear to have the most scope of benefiting the investors.

Because I have not really mastered the art of investing, I have upto now relied on two filters mainly- low PE and high ROE/ROCE.

I admit that this is simplistic. Thats why I urge more experienced investors to give their views here. As you have rightly observed, too stringent a criterion may leave us with no shares to invest. But sticking to some well-defined criteria may well instill discipline in us.

I have recently started investment in Patel Engineering because of the infrastructure play and because it is getting orders after orders. But today I have discovered that its debt is more than its market cap!

Surender · March 18, 2023, 4:55am

On the contrary, he applied too-many.
A simple approach could be:

Start with any name
Identify the mispricing to bet upon so that odds to win are 1:1
Bet only if potential payout is 3 : 1

meekinvestor · March 18, 2023, 5:01am

I have edited my comments.

But I have one question. If the criteria he has applied are too strict, shouldn’t it make the investment in the selected stocks safer?

For example, I have always found Godawari Power and Ispat attractive because of its low PE and high ROE. Caplin Point is also in the author’s list. Its on 52 week low, so it should pave for a rather safe investment?

meekinvestor · March 18, 2023, 5:04am

You are right, but isn’t that the crux?

pkfrmiitr · March 18, 2023, 7:44am

My two cents on Small caps investing based on last 2 years of experience :

String Industry tailwind - mostly India structural story based tailwinds
If possible , look for monopoly / oligopoly sectors
Good track of Business scale up in last 10 years from micro to small cap journey
Capex lined up in next 2-3 years
Low debt preferable
6.Valuaation cap at 20 PE . Exceptional cases can be looked for 35-40 PE maximum.
Weekly Chart should not be too discouraging
Last but the most important point - a portfolio of atleast 25 to 30 stocks to diversify company’s specific risk

meekinvestor · March 19, 2023, 12:35pm

Here I am posing a question with reference to two companies as to whether the stocks become worthwhile if the companies start receiving orders.

Here is the first. Patel Engineering. As per the website of the company, it is into, “all sectors of the Infrastructure industry from dams, tunnels, micro-runnels, hydroelectric projects, irrigation projects, highways, roads, bridges, railways, refineries to real estates and townships.”

The price graph of the company does not makes for an appetising viewing.

Even the past financials are not exactly inspiring.

The PE is rather low. This is what, alongwith the spate of orders it has received, and the fact that it is really trading at a rock-bottom price arouses interest.

What is however not palatable is the fact that it has a debt of ₹ 2,221 Cr, which is more than its market cap of ₹ 1,157 Cr.

This makes it practically a basket case.

As for the orders I have mentioned earlier, in the recent times it has received multiple orders. ‘Rupen Patel, Chairman and Managing Director of Patel Engineering Limited says, “In the recent past, we have declared L1 for four other irrigation projects located in Maharashtra, Madhya Pradesh and Karnataka. Further, these two new projects will help strategically deploy and utilise resources more efficiently. With these two new L1 projects, our share of order wins including L1 in this financial year is around 5,900 crores.”’ (March 16, 2023)