Taking risk and understanding risks are two different things: 5 smallcap stocks from different sectors

While it is a well known fact that small caps as a segment are more prone to risks of sharp decline. However, the reality is that when small caps are doing well, all the caution is thrown out of the window. The reason is, small gains also tend to gain very sharply in a short period of time and that is what makes them attractive to investors. Given the valuations, at this point of time, it would be logical that investors should put more checks and balances while navigating the small cap space. Also beware of rude shocks which this segment of the market may witness given the fact there are more headwinds ahead.ET screener powered by Refinitiv’s Stock Report Plus applies different algorithms & filters to all BSE and NSE stocks, and lists stocks which fulfill the various criteria as specified into the algorithms & filters to find those which might help navigate the stock market.

The recent performance of small caps has brought them in the category of stocks where the desire to own them is “highest”. But the fact which gets ignored in such conditions is that “risks” are also at the highest. The reason, valuation across the board are expensive and corrections in small caps are probably the most brutal ones. Just jog your memory back to October 2021. For all those who still want to take exposure to them, in such times, it would be better to be cautious in selecting the stocks, better to go with buying in smaller quantities and buy stocks where the underlying business has good macro fundamentals. Refinitiv’s Stock Report Plus which lists stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy .

For a large majority of investors, when the word “ large cap” is used , it is stocks like HDFC bank, ICICI and other big names come to mind. The fact is that these stocks have moved into the mega cap category. There is another set of stocks which have now entered into large cap territory when it comes to market capitalisation but in terms of certain aspects of business, some of these are from sectors which are getting discovered or getting re-rated as if they are mid-cap stocks. Having exposure to them might appear to be risky, but then the possibility of reward is higher as more institutional investors take exposure to them.

Investing in small cap stocks is one of the toughest challenges for any investor. However, if an investor gets his decision right, the returns on investment on getting (ROI) are high. ET screener powered by Refinitiv’s Stock Report Plus lists down stocks from small cap space with high upside potential over the next 12 months, having an average recommendation rating of “Buy” or Strong Buy and also meeting some parameters like net margins and return on equity.

In a period where small-cap stocks underperformed significantly, leading to a situation where large investors were calculating their losses in their small-cap holdings, there would be a group of steadfast enthusiasts who continue to see potential in small caps. Investing in these stocks, even amidst turmoil, can be sensible for those prepared to maintain their investment for three to five years. However, it's crucial to recognize the distinction between high-quality and poor-quality businesses across the small, mid, and large-cap spectrums, as well as the difference between the intrinsic value of a stock and the overall value of the company. Certain niche small businesses may still generate significant returns over time if they are held long enough. On the other hand, if one's approach to small-cap investments is merely based on the absolute value of a stock with hopes of a tenfold increase, then it's a misconception. Stock market investing, whether in small, mid, or large caps, should not be driven by unrealistic expectations; otherwise, it leads to nothing but undue stress, rather than substantial returns.

Even as nifty corrects, more small cap stocks are joining the party and on a number of days the breadth of the small cap segment is better than large caps. Coming on the list is auto ancillary unit to logistic company. ET screener powered by Refinitiv’s Stock Report Plus applies different algorithms & filters to all BSE and NSE stocks, and lists stocks which fulfill the various criteria as specified into the algorithms & filters to find those which might help navigate the stock market.

When it comes to small cap investing, the word “agnostic” becomes very important. The reason one should be “sector agnostic” is that there are small cap companies across sectors which have potential to do well. Then one should “ recommendation agnostic” the reason, majority of the small cap companies are not covered at all by a single analyst and hence they don't have recommendations of either buy or sell. So, when it comes to small cap stocks, look beyond what analysts are tracking. But remember one principle that risks are highest in this category of stocks.

Small caps are always the riskiest place to take espouse when it comes to equity. But it is also a space where if one is able to find the right stock at the right time, gains are much higher. So a space with the highest risk and highest reward. While risks are an integral part of the markets, one can not eliminate it but reduce it. How you do it, by putting additional criteria of quantitative and qualitative checks. ET screener powered by Refinitiv’s Stock Report Plus applies different algorithms & filters to all BSE and NSE stocks, and lists stocks which fulfill the various criteria as specified into the algorithms & filters to find those which might help navigate the stock market.

These small cap companies have shown positive returns in the last one month at a time when markets have been overwhelmed by news and other developments. ET screener powered by Refinitiv’s Stock Report Plus lists down stocks with high upside potential over the next 12 months, having an average recommendation of “buy” or strong buy .