By Baniya Beast,
Only when the tide goes out, you’ll discover who’s been swimming naked. – Warren. E. Buffett
For the past 15 months Smallcaps were brought down to their knees and they were torn apart when it comes to their market prices. Their existence was questioned and smallcap investors cursed themselves for being invested in these companies. Fortnight back, I penned down the important question – When will the Smallcaps rally?
And as it turns out the Margin Trade Funding (MTF) punters are back!
Majority of the stocks have gone up between 15-30% in past 10 odd trading sessions. Even the lower quality and garbage stocks have shot up (and that’s what kills me).
I only hope you’re not the part of this folly. Since your stock is going up, you’ll believe that your investment thesis is finally playing out. Market is surely being indifferent now but it will discontinue this.
Legs of rally
Bottom formation and the first bounce
There will be lot of destruction and the terminal will be red (from Feb’18 to May’19). And post this bottom formation (pre-Exit Poll), majority of the stocks will bounce and display hulk-like strength.
Time for some breather
Market being overbought in short-term will take time to cool-off and give away 5-10% of the gains. Here some good quality and earnings delivering companies will not be subject to gravity. They’ll be flattish at worst.
Consolidation and sustainable long-term rally
Boy this is the differential. All your stock picking ability and knowledge and conviction will be tested. The shabby companies which moved 15-30% in the first leg will consolidate or at best move some more percentage points. But the real gems, IP driven businesses, growth stories will continue the rally and probably double or go beyond.
Smart money is unable to create alpha now because all the stocks have bounced from the bottom. They’ll generate disproportionate returns in the 2nd and 3rd legs of rally.
Hope you’re holding the sona and not pittal
Gold and brass both shine with brown color, but one is far richly valued than the other. Indian Smallcaps are currently available at one of the cheapest valuations and present multi-fold return opportunity. But you gotta be highly certain that you’re invested in the right business.
It is those 20-30 companies from ~5,000 listed universe that will become from smallcap to midcap and from midcap to largecap. Do you think your company is one of them?
Rest all you need to do is wait for the market to be indifferent to your company (which currently it is not).
This article was originally published by author Baniya Beast.