smallcap stocks to buy: Several smallcaps’ valuation skyrocket! Should your money chase this space?

Factors triggering the selloff were high inflation due to rising commodity prices amid geopolitical tensions between Ukraine and Russia, aggressive rate hikes by central banks to tame inflation, COVID crisis in China, and recession worries.

Year-to-date, Nifty smallcap 100 index has fallen over 14%, whereas Nifty 50 has gained about 6%.

Despite the correction in the broader market, several smallcap stocks are trading at valuations way above the industry average.

Stocks such as

, Tasty Bites Eatables, , , , & Engineering, , and are trading at 163-980 times their 12-month trailing earnings, way above industry averages of 21-67 times.

If one looks at data since 2011, the price-to-earnings (P/E) multiple of Nifty Smallcap 100, on average, stood at 2.07 times the P/E of Nifty 50.

As India’s equity market capitalisation is increasing, smallcap as a segment is also seeing an upward shift in the market cap.

While several stocks have seen a significant expansion in valuation multiples, market experts continue to see ample opportunities in this space for investors.

According to InCred Wealth, historically, when relative valuations of smallcaps stood at 0.7 times the largecaps, smallcaps on an average have delivered higher returns over the next one-year, three-year and 5-year holding periods.

The wealth management firm believes that the scope to spot multibaggers is higher in the smallcap space.

“We suggest gradual utilisation of cash in equity portfolios (over 6 months or so) by deploying in broader markets through actively managed mid and smallcap-oriented strategies,” said Yogesh Kalwani – head, investments and family office at InCred Wealth in a report.

The midcap and smallcap segments are relatively under-researched, have a larger universe to choose from, and offer a significant valuation cushion currently, Kalwani added.

According to Niteen Dharmawat of Aurum Capital, it is the smallcap companies that do well in times of economic downturn, as has been evident this year.

“I think smallcap has a lot of steam remaining, wherein wherever there are good results and a company has good management, they will continue to do well,” he said.

(With data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)