Small-caps outsmart bigwigs on D-Street

The SME (small- and mid-cap enterprises) space is buzzing with action even as their large-cap counterparts appear to have lost steam amid the downtrend in Asian markets over economic concerns.

Investors have apparently shifted focus to second-rung stocks to take advantage of cheaper valuations vis-à-vis front-run stocks. This is also reflected in sharp gains in mid-cap and small-cap indices in the past few weeks. Many SME stocks, in fact, have been scaling new peaks in the current market, which according to brokers, could be an indication of some revival of interest among retail players.

In the past one month, the BSE Mid-Cap Index, which consists of 221 actively-traded second-rung stocks, climbed 6.5% while the 464-stock Small-Cap Index shot up 12.4%. The BSE 30-share Sensex was up 2.6% during the period. The list of SME outperformers includes 110 stocks which have gained between 50% and 180% in one month. Some of them have frequently been hitting upper circuit limit, say 5%, 10% or 20%, before reaching to the current levels. As many as 323 stocks in BSE’s B-group, which mostly houses second-rung stocks, hit the upper circuit filter on Thursday when the Sensex ended flat at 15,781.

“Investors’ risk appetite remains very high even after the sharp run-up in the market. Valuations of Sensex and Nifty stocks appear a bit stretched, prompting investors to look for value picks in the SME segment” said Centrum Broking’s executive director Sanjeev Patni. He, however, said investments in SME stocks could be more risky than in front-run shares and so the focus should be on the companies with good long term prospects.

While there could be genuine buying driving these shares to the current levels, analysts, however, do not rule out the possibility of speculative interest behind the rally, particularly in stocks of such companies whose fundamentals do not inspire much confidence. Quite a few stocks have risen sharply on low volumes reflecting lack of broader participation in the trading.

“Investors should not get carried away by the sudden frenzy in a particular stock unless they are confident that the company concerned is fundamentally sound and has potential to offer better returns to the shareholder in future,” said an analyst with a Mumbai-based institutional brokerage on condition of anonymity.

While analyst concerns about genuineness of interest in the SMC space may have its merits, the encouraging fact is that at the broader level, trading volumes (quantity of shares traded) in medium- and small-cap stocks have risen significantly in the past few months. BSE’s B-group attracted the daily average volume of nearly 23 crore shares in the current month so far compared with 16.6 crore shares in the previous month.

The volume has shown remarkable improvement in the current year, after declining to as low as 6.3 crore shares in November, 2008. The B-group turnover (value of shares traded) jumped from Rs 1,005 crore in July to Rs 1,500 crore in August.

Source: EconomicTimes