Saturday, October 28, 2017

An Introduction To Small Cap Stocks



Courtesy : Investopedia

Small cap stocks have a bad reputation. The media usually focuses on the negative side of small caps, saying they are risky, frequently fraudulent and lacking in quality that investors should demand in a company. Certainly these are all valid concerns for any company, but big companies (think Enron and Worldcom) have still fallen prey to issues of internal fraud that virtually destroyed shareholder interest. Clearly, company size is by no means the only factor when it comes to investors getting scammed. In this article we'll lay out some of the most important factors comprising the good and the bad of the small-cap universe. Knowing these factors will help you decide whether investing in smaller-capitalized companies is right for you.

Background
Before we get into the pros and cons of small caps let's just recap (no pun intended) what exactly we mean by small cap. The term refers to stocks with a small market capitalization, between US$250 million and $2 billion. Stocks with a market cap below $250 million are referred to as micro caps, and those below $50 million are called nano caps. Small-cap stocks can trade on any exchange although a majority of them are found on the Nasdaq or the OTCBB because of more lenient listing requirements.

It is important to make the distinction between small caps and penny stocks, which are a whole different ball game. It is possible for a stock to be a small cap and not a penny stock. In fact, there are plenty of small caps trading at more than $1 per share, and with more liquidity than the average penny stock.

Why Invest In Small Cap Stocks?
When you are eyeing small cap stocks, a number of positive factors weigh against some of their negative attributes. Below we have outlined three of the most compelling reasons why small caps deserve representation in many investors' portfolios.

1. Huge growth potential
Most successful large cap companies started at one time as small businesses. Small caps give the individual investor a chance to get in on the ground floor. Everyone talks about finding the next Microsoft, Wal-Mart or Home Depot, because at one point these companies were small caps - diamonds in the rough if you will. Had you possessed the foresight to invest in these companies from the beginning, even a modest investment would have ballooned into an extravagant sum.

Because small caps are just companies with small total values, they have the ability to grow in ways that are simply impossible for large companies. A large company, one with a market cap in the $1 billion to $2 billion range doesn't have the same potential to double in size as a company with a $500 million market cap. At some point you just can't keep growing at such a fast rate or you'd be bigger than the entire economy! If you're seeking high-growth companies, small caps are the place to look.

2. Most mutual funds don't invest in them
It isn't uncommon for mutual funds to invest hundreds of millions of dollars in one company. Most small caps don't have the market cap to support this size of investment. In order to buy a position large enough to make a difference to their fund's performance, a fund manager would have to buy 20% or more of the company. The SEC places heavy regulations on mutual funds that make it difficult for funds to establish positions of this size. This gives an advantage to individual investors who have the ability to spot promising companies and get in before the institutional investors do. When institutions do get in, they'll do so in a big way, buying many shares and pushing up the price.

3. They are often under-recognized
This third attribute of small caps is very important. What we are saying here is that small caps often have very little analyst coverage and garner little to no attention from Wall Street. What this means to the individual investor is that, because the small cap universe is so under-reported or even undiscovered, there is a high probability that small cap stocks are improperly priced, offering an opportunity to profit from the inefficiencies caused by the lack of coverage devoted to a particular area of the market.

The Drawbacks to Small Cap Investing

As with any investment, small caps are not without inherent drawbacks. These include:

1. Risk
Despite the fact that small caps demonstrate attractive characteristics, there is a flip side. The money you invest in small caps should be money you can expose to a much higher degree of risk than that of proven cash-generating machines like large caps and blue chips.

Often much of a small cap's worth is based on its propensity to generate cash, but in order for this to happen it must be able to scale its business model. This is where much of the risk comes in. Not many companies can replicate what U.S. retail giant Wal-Mart has done, expanding from essentially a mom-and-pop store in Arkansas to a nation-wide chain with thousands of locations. Small caps are also more susceptible to volatility, simply due to their size - it takes less volume to move prices. It's common for a small cap to fluctuate 5% or more in a single trading day, something some investors simply cannot stomach.

2. Time
Finding time to uncover that small cap is hard work - investors must be prepared to do some serious research, which can be a deterrent. Financial ratios and growth rates are widely published for large companies, but not for small ones. You must do all the number crunching yourself, which can be very tedious and time consuming. This is the flip side to the lack of coverage that small caps get: there are few analyst reports on which you can start to construct a well-informed opinion of the company.

And because there is a lack of readily available information on the small-cap company, compared to large caps like GE and Microsoft which are regularly covered by the media, you won't hear any news for weeks from many smaller firms. By law these companies must release their quarterly earnings, but investors looking for more information will be hard-pressed to find anything.

The Bottom Line
There is certainly something to be said for the growth opportunities that small cap stocks can provide investors; however, along with these growth opportunities come increased risk. If you are able to take on additional levels of risk relative to large-cap companies, exploring the small cap universe is something you should look into. Alternatively, if you are extremely risk averse, the rollercoaster ride that is the stock price of a small cap company may not be appropriate for you.

193 comments :

  1. dear sir your views on pharma sector generally? ans can we consider glenmark as an option for sip

    ReplyDelete
    Replies
    1. Contra investing is good if you have enough patience and conviction.

      Delete
  2. sir please suggest any road construction company for investment

    ReplyDelete
    Replies
    1. Already suggested Ramky infra from this space

      Delete
    2. Sir, still Ramnky can buy at this levels ?

      Delete
  3. Dear VP sir,
    Your views on your old pick Aimco Pesticides..!!

    ReplyDelete
    Replies
    1. Aimco suggested @ Rs.45 , neutral at CMP Rs.250

      Delete
    2. Hi Sir,
      Do you recommend it to be a hold at this price. The business is doing very well .

      Delete
  4. Dear VP sir, what is your view on Manappuram finance?

    ReplyDelete
    Replies
    1. Expecting range bound movement in medium term unless any special development.

      Delete
  5. Dear Sir,

    Recently I was going through a company called intense technologies, which is a mix of both product and service based IT companies.
    Are you tracking this company ? In last few months this stock fell from 180 levels to 80, do you see any specific negatives to this company?

    And are you tracking High ground enterprises?

    Thanks in advance,
    Cheers

    ReplyDelete
  6. Hi VP sir, please share your views on Fairchem spl chemicals. Do you expect high growth in future due to Fairfax investment.

    ReplyDelete
  7. ur views on hindustan media ventures. the price came down. any concerns on its growth

    ReplyDelete
    Replies
    1. Slow growth in advertisement income and increased paper price may negatively impact margin.

      Delete
  8. hello sir , what you think about SME stocks

    ReplyDelete
    Replies
    1. Not the exchange but the potential of business and entry price is more important. Some additional liquidity risk is there in SME at present.

      Delete
  9. sir wt is ur view on united spirits

    ReplyDelete
  10. Hi VP Sir, Please share your views on capital trust for long term investment. Thank You.

    ReplyDelete
    Replies
    1. Capital first suggested as a must buy earlier at lower level

      https://value-picks.blogspot.in/2014/07/capital-first-ltd-must-buy.html

      Stock already appreciated 250% from suggested level .Prefer to book part profit and hold the rest as cost free.

      Delete
  11. Hi Sir,

    What is your view on Lasa Supergenerics,Texmaco Rail, PTC india and GSFC. Are you positive on any of these stocks?

    Regards,
    Sameer

    ReplyDelete
  12. What’s ur view on PSU banks ? Do I like anyone from PSBs Sir?

    ReplyDelete
  13. Sir your views on your old pick pioneer embroidery.

    ReplyDelete
    Replies
    1. Its last few quarters are below expectation

      Delete
  14. Dear VP sir, what is your view on following socks?

    Moldteck packaging
    Polyplex corporation

    ReplyDelete
    Replies
    1. Both these stocks are suggested at lower level. Prefer to hold Moldtek and book at least part profit in Polyplex

      Delete
  15. How do you bharatmala highway project?
    What stocks should we keep in our radar and what are you tracking regarding this project in the years to come sir?

    ReplyDelete
    Replies
    1. Idea is good but implementation is important .
      Tracking only Ramky Infra as of now.

      Delete
  16. Hi, Whats you view on Accelya kale?

    ReplyDelete
    Replies
    1. this stock suggested below Rs.130 which is currently trading around Rs.1400 . Prefer to book at least part profit. Recommendation link below.

      http://value-picks.blogspot.in/2012/07/kale-consultants-ltd-buy.html

      Delete
  17. Sir Your view on centrum capital Ltd, Motilal Oswal, swaraj engines ltd, TV Today, KEI industries Ltd, Rain Industries ltd, Repro India Ltd and Man Industries ltd plz sir

    ReplyDelete
  18. Hello! Its regarding Godrej Agrovet. Its a good business but valuationwise its looking expensive. Can we enter at this price?

    Also please share your views on everest Industries?

    ReplyDelete
    Replies
    1. Use corrections to enter in Godrej agrovet
      Not strictly tracking Everest

      Delete
  19. Sir it view on your old record Astec and also ur view on Avantel. Thanks

    ReplyDelete
    Replies
    1. Astec already turned as a 10 bagger and Avantel a 5 bagger. Prefer to book profit in Astec and in case of Avantel better to wait for few more quarters to understand how order flow happening.

      Delete
  20. Dearest VP sir,
    As lots of ipos are hitting primary markets, also market is trading at a high pe,Markets are trading at all time higs, lots of retail participation through mf sips is coming to markets,Interest rate cycle can reverse in near future.

    Do you think one should be cautious going forward.

    ReplyDelete
    Replies
    1. Depends on the valuation of stocks one holding.

      Delete
  21. Dear VP Sir your View on Sunil Hitech and MBL Infra
    Regards
    Venugopal Reddy

    ReplyDelete
  22. Dear Sir , Whats ur view on Binny ltd.
    Please reply
    Regards

    ReplyDelete
    Replies
    1. Company writing off huge amount as other expenditure without mentioning any details .Such activities creating lot of doubt about corporate governance standards.In September quarter Rs.25 Cr written off.

      Delete
  23. Good evening, Sir. Thanks for your valuable contribution to budding investors like me...

    Can you share you view about Sanwaria Consumers... The stock has correct more than 150% in last month after their stock bonus and awesome quarter results.

    ReplyDelete
  24. Dear sir, please share your view on BP Capital

    ReplyDelete
  25. Sir ..always good to see ur frequent updates... Great article shared by you... We not only earn but most importantly learn from you... one question please - any further thoughts on websol ?

    ReplyDelete
  26. pls tell ur views on on jk agritech

    ReplyDelete
    Replies
    1. Adjusted to the de-merger ,stock already given 10 times return from suggested level .As of now I am not tracking any seed companies.

      http://value-picks.blogspot.in/2010/07/jk-agrigenetics-treasure-hunt.html

      Delete
  27. Hello sir, let us know your view on gufic bio and murudeshwar ceremic??

    ReplyDelete
  28. Hi VP Sir, please share your views on Rishi techtex for investment.

    ReplyDelete
  29. Hi VP sir, Please share your views on Nila Infra , Future Consumer for long term investment. Thank you

    ReplyDelete
  30. Dear sir
    Amid crude oil pressure showing good growth.
    Are you tracking any aviation sector scrip?

    ReplyDelete
  31. Sir r u tracking reliance home finance

    ReplyDelete
  32. Sir what's your view on Tata motors, Cinevista, PNB?

    ReplyDelete
    Replies
    1. Sorry , not tracking any of the above mentioned stocks.

      Delete
  33. Sir what's you view on Sun pharma?

    ReplyDelete
  34. Dear VP ji
    Thanks for the informative article.
    Please share your opinions on,

    Olympic cards
    SRS
    Times group industry.

    ReplyDelete
    Replies
    1. varkumar ji, i just booked 60% loss in SRS :( still holding some shares. please share your thought

      Delete
    2. Dear VP Sir,
      Your views on Bigbloc Construction ..i have checked their presentation and website, i like their futuristic product in construction space, expansions, margin improvement, strategic mfg plants location, good promoters and increasing profitability...

      Delete
  35. dear vp ji
    Are you tracking GKB opthalmics?it is corrected from 183 level,your view will be valuable for me

    Rajjath
    Dubai

    ReplyDelete
  36. Hi sir,

    What is your view on continental petroleum, Om metal infra, Gsfc, Lasa supergenerics.

    Regards,
    Kartheek

    ReplyDelete
  37. Dear Vp,

    Your thoughts on Alphageo currently please.

    ReplyDelete
    Replies
    1. Even with huge order book ,surprisingly it is not moving . Market may not be convinced about the situation after the completion of existing order book due to muted sentiment in oil exploration related sectors.This may change if oil price increase further.

      Delete
  38. Hi sir,
    What is your view on old reco TRIL???

    ReplyDelete
    Replies
    1. Frankly speaking I am not a big supporter of companies unnecessarily splitting their face value.

      Delete
  39. Thank you sir for an update on Ashapura Mine on money control forum. Added more after your comment and my conviction.

    ReplyDelete
    Replies
    1. Act on your conviction , not on other factors.

      Delete
  40. sir , your view on MT educare and zicom

    ReplyDelete
  41. Dear Sir,

    Are you aware about any update on expansion plan of Pioneer Embroideries due on Jan-2017?

    Thanks

    ReplyDelete
  42. Dear VP sir, please share your valuable comments on future growth of stylam industries.

    ReplyDelete
    Replies
    1. If you are asking about the company's business , it may grow . But if you are asking from an investment point of view ,an entry at right price will give good return.

      Delete
  43. Hi sir,

    What is your view on Lasa supergenerics, Gsfc and confidence petroleum

    Thank you

    ReplyDelete
    Replies
    1. Sorry, nor tracking any of the above mentioned companies.

      Delete
  44. Sir what's your view on Websol Energy, Zee Media, Pricol, Bharat Electronics?

    ReplyDelete
    Replies
    1. Tracking only Websol, prefer to hold.

      Delete
  45. Hi VP,
    Whats your view on Sunteck reality at CMP?

    ReplyDelete
  46. Dear Sir,
    What is your current view on your old recommendation Mindtek please.
    Kindly revert please

    ReplyDelete
    Replies
    1. It was expected to perform well on account of Government initiatives on Smart City ..etc . But unfortunately such projects didn't progress on execution level as expected . This may be one reason company could not improve its business so far.

      Delete
  47. Sir, Are you positive Amulya leasing at current level?
    I have invested from 300 level and planning to add more.

    ReplyDelete
  48. Dear sir,

    What is your view on :
    Arihant superstructure
    HFCL

    ReplyDelete
  49. Dear VP,
    Any view on Ruchi Soya? Do you see a turnaround happening?

    Thanks,
    Avinash

    ReplyDelete
  50. Hello Sir, Whats your view on Star cement?

    ReplyDelete
  51. Sir, is it worth buy Tata power at current level? For solar energy stort

    ReplyDelete
  52. Dear VP sir,

    at present rate can i Enter Strides Shasun and Sequent Scientific for Long Term

    ReplyDelete
    Replies
    1. Sequent Scientific is a stock suggested at Rs.138 when its face value was Rs.10 . now it splitted ti Rs.2 and 5 shares issued to those holding 1 share. On adjusted price stock already given five times return post FV split . Not suggesting to buy at CMP.

      Not tracking Strides Shasun

      Delete
  53. Sir how does Tamil Nadu Perto Products and Balasore Alloys look to you ?

    ReplyDelete
    Replies
    1. Not tracking Balasore

      As a cyclical business TN petro may show improved performance if the improvement in its product price is an indication.But one should properly track the product price movement and time entry and exit accordingly.

      Delete
  54. Sir your view upon Vardaman special steel .... thanks

    ReplyDelete
  55. Sir what's your view on Claris life

    ReplyDelete
    Replies
    1. This is one stock suggested years back at lower level. Few of the recent activities of promoters raising questions about their integrity , hence not actively tracking as of now.

      Delete
  56. Dear VP,

    what is your view on MIC , Why is MIC electronics price crashed in last few months ? what is your long term view on MIC, can i hold it , regards suraj

    ReplyDelete
    Replies
    1. Commented a lot about MIC in recent past.

      Delete
  57. Sir your post reg small cap stocks is specially relevant for me right now because I have been researching a small cap from real estate space.. Emami Infra. As per the latest presentation uploaded to the exchange, the company will be realizing 20 million sq ft of space in the next 3 years, with the flagship project being Emami City. The company has a low cost base because it's land acquisitions were done at very low costs in upcoming areas of various cities. It's also in the process of merging Zandu Realty with itself and has signed a few JVs as well. They have not yet started showing any revenue which is expected to happen from Q4 of this year or Q1 of next year. However, they are carrying debt on their books of 1200 Cr and the stock has already gone up 4 times in the last 1 year.

    I would love to have your view on this whether one can still enter into this stock going by the prospects the company has outlined in it's presentation. Pls advise. Thanks.

    ReplyDelete
    Replies
    1. Tracking on Godrej Property from this space.

      Delete
  58. Sir, whats your view of Nandan Denim, Cyient, Apollo Hospitals Enterprises

    ReplyDelete
  59. Sir,In MULTIBASE INDIA my investment should continue for another 3 _4 years or not
    Please give advice

    ReplyDelete
  60. Sir Current view on Aksh Optifiber.

    ReplyDelete
  61. Guruji , Do u like Transformers and rectifiers ?

    ReplyDelete
  62. Dear VP Sir
    Now Sequent is Currently Trading on Lowest Shall I buy it for Long term

    ReplyDelete
  63. sir, PTL enterprise ,your view please

    ReplyDelete
  64. Greetings Sir ,
    could you please share views on : hold or sell
    SAMKRG piston
    Amines past
    Essel propack
    Krebs
    Shemaroo ent
    NCL

    Thanks a lot

    ReplyDelete
    Replies
    1. I think it is better to review these stocks once their Sep result published.

      Delete
  65. sir , your view on agro tech food

    ReplyDelete
  66. Dear VP sir, what is your view on Berger paint india ?

    ReplyDelete
  67. VP, your view on Autoline indus.

    Also want to know your current view on old recommendation :
    Goodyear India
    Muthoot capital

    ReplyDelete
    Replies
    1. One can hold Goodyear and Muthoot capital

      Delete
  68. Dear Sir

    Hope you are doing very fine. Could you please advise your view 'MBL Infra' for long term investment perspective.Thanks in advance for your insights.

    ReplyDelete
    Replies
    1. Very high risk, not sure whether they can come out of present issues.

      Delete
  69. Sir what is your view on granules india

    ReplyDelete
  70. Sir, any idea why EPC INDUSTRIES results were pathetic ? Both top line and operating profits gone for a toss. Thanks

    ReplyDelete
    Replies
    1. Yes, it was pathetic , better to wait few more quarters to understand the implication of the starting of production from their new factory and then take a call.

      Delete
  71. Sirji
    Plenty of times i requested your view on sanghi industries. But unfortunately you did not reply.Kindly advise. Thanks Hari

    ReplyDelete
    Replies
    1. Expecting range bound movement in medium term

      Delete
  72. Sir what is your view of Sanwaria Agto & Khaitan Chemical ? Shall we purchase at this level ?

    ReplyDelete
  73. Dear vp bro,
    do you have any views offlate on kiri industrires from spl.chemicals.

    ReplyDelete
  74. Hi sir Godrej Properties Q2 net profit up 88% at Rs44 crore. Please suggest is it the right price to buy into the stock and do you think promoters can continue this momentum with tail wind from this sector.

    Thank you
    Mohammad Amjad

    ReplyDelete
    Replies
    1. It is difficult to analyse property development companies on a quarterly basis due to the nature of their business.

      Delete
  75. Hi sir. Please comment your views on Dilip buildcon. Sir, if you are not tracking please If possible have a look. I need your advice sir.

    Thank you
    Amjad

    ReplyDelete
    Replies
    1. It is very difficult to say something about a company by just looking into its published numbers . Such opinions may become counter productive if we are not tracking it for a reasonably long time.

      Delete
  76. Dear VP sir, what is your view on Salzer Electronics Ltd ?

    ReplyDelete
    Replies
    1. The announced spending ( If happened) in railway is expected to bring more business to company

      Delete
  77. Dear VP Sir,
    Do you track Aditya Birla Capital? How is it for a longterm view?

    Rgds
    Shyam

    ReplyDelete
  78. Sir do you have investment/interest in ASHAPURA MINE?

    ReplyDelete
  79. VP sir
    holding stocks for long term after reading through your multistage posts ..
    now have a problem in exiting , many of my stocks with 200% just came to double digit ,

    Could you please guide me regarding the exit indicators ?

    ReplyDelete
    Replies
    1. Complete spoon feeding is very difficult. If one bought a stock , investor should take some effort and spend time to study the further happenings in the company and follow an exit strategy depends on such developments and own risk taking capacity.

      Delete
  80. Dear sir
    What's your present views on your old reco Camphor allied products.
    Now it hits 4 digits
    Thanks you

    ReplyDelete
  81. Hi Sir,
    Your views on any logistics company?

    ReplyDelete
  82. Your current take on patels airtemp and your outlook on VIP clothing sir will be highly appreciated

    ReplyDelete
    Replies
    1. Revival in sector needed for Patel Airtemp ,better to wait for few more quarters if you are holding..

      Not tracking the other one.

      Delete
  83. Dear VP Sir,

    Please share you views on Jaipan Industries as a long term investment.

    Thanks,
    Praba

    ReplyDelete
  84. Dear VP Sir, kindly share your view on Sampre Nutritions. Thanks.

    ReplyDelete
  85. Are you still +ve on APCL & srikalasti pipes?

    ReplyDelete
    Replies
    1. One can hold APCL.
      Only the Lanco label is the issue of Sri Kalahasti :)

      Delete
  86. good evening sir

    India Nippon result out now....your views on the result pls....what you think about it....

    ReplyDelete
  87. sir, pincon lifestyle , your view please

    ReplyDelete
  88. Sir ur views on Automotive Axles and Subros. Thanks in advance

    ReplyDelete
    Replies
    1. Companies are good but as an investment valuation is also important .Some correction in price will give comfort

      Delete
  89. Hi Sir,

    Need your views on these stocks.

    1. Banswara syntex
    2. Loyal textiles
    3. Meghmani organics.

    Kindly request you to comment on all the three stocks

    Regards
    Abhi

    ReplyDelete
    Replies
    1. Sorry, not tracking any of these companies

      Delete
  90. Sir, are you tracking Tata teleservices ? Your views on the same please ? Thanks in advance.

    ReplyDelete
  91. Sir can i hold godrej property for 10 year?

    ReplyDelete
    Replies
    1. In my opinion ,there is no company to buy and forget for 10 years.Lot of disruptions happening around and the changes are very fast , so one should properly track and make necessary changes according to the changing situation.

      Delete
  92. Dear sir.. Plz share ur views on country club india Ltd.

    ReplyDelete
  93. Dear Vp sir,

    I am big fan of your blog. Can you please share your view about ICICI lombard. Can i buy?

    ReplyDelete
  94. What're your views about The Byke Hospitalities?

    ReplyDelete
  95. Thanks & Hats off to you Sir for sparing selflessly your valuable time & being guiding light for so many small investors.

    ReplyDelete

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