Recently, most of the listed SMEs (Small and Micro Enterprises) in India have registered a steep decline in their stock prices, even as India’s largest indices (NIFTY and SENSEX) have made consistent new all time highs. I’ve myself discussed some of these names earlier in my blog namely Shivalic Power Control Limited, Trom Industries etc.
The recent correction phase presents high-risk investors with an incredible opportunity to buy fundamentally strong SMEs at attractive valuations. The correction lately can be attributed to the fear surrounding the integrity of the promoters of the SME companies. There are enough reasons to believe that some of the unethical SME promoters have used the ongoing bull market to defraud investors of their hard-earned money.
This has created an environment of fear in the minds of SME investors. A lot of them have preferred taking the high road and exiting completely out of these stocks. This is what has led to the correction.
But two things are to be kept in mind:
- Not all SME promoters are fraud.
- Some of the SME companies are going to present really strong earnings in the earnings season starting October 1st.
It is to be noted that our capital markets now are more efficient than ever.
Our markets would be quick to price in any growth or chances of growth in the heavily-corrected SME segment. It doesn’t have an option. Because some of the SMEs that have fallen from grace are just too good to ignore. Investors who can read the signs will want to jump on the bandwagon before others can – this is all that the investing game is all about – identifying signs early and getting skin in the game.
Quality SME companies are consistently bringing in new orders, executing their existing order book, expanding their capacity and raising fresh capital from new investors, quiet unfazed by what’s been happening in the secondary markets. Accumulating them now could be once-in-a-lifetime opportunity, as these stocks might never see such valuations again.
So what should you do if you are an SME investor right now?
1. Evaluate your portfolio
Are the stocks you own fundamentally sound? Did you do your own due diligence before buying them? Or did you buy them on borrowed conviction or tips?
Right now could be the time to take the trash out and bring quality companies in.
2. Do your research
See if the company is consistently getting new orders. If the company is consistently expanding its order book, it could be a telltale sign that the stock is just gathering itself up before making a huge leap forward.
Watch management interviews on YouTube. If possible, get in touch with them as well. Read their con-calls and see if the company has walked the talk in the past.
Basically, gather an insight into what the company has planned for its future.
3. Sector Rotation
There are signs that point to the fact that some of the erstwhile trending sectors could be falling out of flavor with capital market investors. Sector rotation is very normal. At this point, it would be wise to take calculated guesses on what sector could be the next big thing – and concentrating further on that if the dots connect.
4. Have faith and don’t panic
It’s hard to deny any stock its rightful place in the secondary market if its a quality company inside and out. You ought to have conviction in your choices and believe that its time will come. Hold on and wait. It sounds easy but its the toughest thing to do in the long run.
The correction phase is nearing its end, at least for those companies that are about to report strong earning quarters. You just need to find those companies that can repeat it for at least a couple of years or three and voila – you have an easy ten-bagger in your hands. For the time being, accept such corrections as normal parts of being an SME investor. Volatility is your friend, it has presented you with an opportunity to average down further on stocks you believe are the multibaggers of tomorrow.
Remember that in the stock market, history may not repeat but it certainly rhymes. In March of this year, SEBI chief Madhabi Puri Buch had warned of manipulation in SME listings, post which the NSE Emerge index itself had crashed by more than 20%. But after it was all said and done, it proved to be just a flash in the pan – the index steamrolled up by 60% post that lull phase and many SME stocks in the months after that have doubled, tripled and even quadrupled very very quickly.
The investors who had stayed put have made a lot of money in return for their patience and conviction – two of the only things that translate to money in the share market.
Writer is a stock market enthusiast – passionate about writing as much as about stock hunting. Join his free WhatsApp community here.