Steep Fall in the SmallCap Index from Record Highs Unlocks Opportunities

SmallCap Index is down by 12% from a recently hit record high on 15 January 2018. The correction was long overdue considering the run-up of stocks in the small cap space. The price/ earnings (P/E) ratio of the small cap index had recently touched an insane level of 111 times- the highest ever. With huge domestic inflows into the mutual funds and SIPs, the index was on a roll unit the recent correction.

The smallcap index had started correcting post its record high on 15 January and a massive blow came in on the day of Union Budget i.e 1^st February wherein the index corrected by 4.6%.

On the day of Union Budget, there was a bloodbath in the junk small caps. However, quality stocks fell at a much slower pace. Let’s compare the fall in the prices of quality and non-quality smallcaps from the record high on 15^th January 2018.

Quality Smallcaps

Company Name Price as on 15^th January Price as on 8^th February Gain / (Loss) TVS Srichakra 3,666.90 3,606.2 -1.7% Sonata Software 295.70 288.8 -2.3% VRL Logistics 440.75 428.55 -2.8%

Source: ACE Equity

Junk Smallcaps

Company Name Price as on 15^th January Price as on 8^th February Gain / (Loss) GVK Power & Infra 26.85 19.65 -26.8% Uttam Galva Steel 26.85 20.5 -28.9% Lanco Infratech 2.24 1.38 -38.4%

Source: ACE Equity

You can observe from the table that the quality smallcaps fell at a much slower pace when compared to the junk one’s. Infact they fell at a pace which was lower than the 12% index correction.

Conclusion: Despite smallcap index being expensive, there are opportunities in this space which one should keep exploring which has the potential to multi-fold your investments. Quality smallcaps will protect your downside risk even at the time of a big crash and over the long term will help deliver good returns.