Even as we continue to see havoc in the smallcap and the midcap space, ace investor Porinju Veliyath notes that there is still potential to create value in the space. “Smart investors have started exploring values in the big-potential small & mid-cap space regardless of the challenging environment,” Porinju tweeted. In a recent report, UBS noted that the small and midcap stocks (SMIDS) have underperformed the Nifty in the current year.
“We recently reiterated our underweight on SMIDs for 2018 in an environment of rising rates and moderating flow (see Fading rate and flow support: underweight SMIDs). Inflow into local equity mutual funds remains positive but started slowing in Q118; inflow in Q2 did not slow further. Our analysis suggests SMID schemes have not seen outflow yet. However, Portfolio Management Services (PMS) schemes (high-net-worth individuals are the investors) have started to see outflow,” UBS said in a note.
However, Porinju Veliyath is unfazed, and says that ‘stock-picking without ‘caps’ is the best long-term strategy,’ to create wealth in the market. The idea is to think beyond the market-cap of the company. In a recent letter to shareholders, Raamdeo Agrawal of Motilal Oswal advised investors to differentiate between quotational loss and permanent loss of capital. “Permanent Capital Loss refers to a massive fall in stock price because the value of the underlying business is significantly eroded. The proxy for value is a company’s profits and profitability. Value erosion (i.e. lower profits), and hence, Permanent Capital Loss in a stock may happen due to a variety of reasons, both industry-specific and/or company specific,” he explained.
In contrast, quotational loss is merely a short-term fall in the stock price with the underlying value broadly intact. Hence, it is imperative to evaluate the likely reasons for the price fall. “If there are signs of a Permanent Capital Loss, cut your losses and run. However, if it is just a Quotational Loss, back up the truck and load. You will most likely end up with a Permanent Capital Gain,” he said in the letter.