Smallcap index deep into the bear zone. Should you go bottom fishing?

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A riot in the market has brought the Nifty Smallcap 100 deep below its peak in October 2021. Will you call the bottom and start taking your picks now or wait? Here's what Ajay Bagga suggests.

Smallcap index deep into the bear zone. Should you go bottom fishing?
A chain of sell-offs in the market has sent the smallcap index deep into the bear zone — when a stock or index falls more than 20 percent from its peak.
The Nifty Smallcap 100 index — which tracks the performance of 100 minnows — entered the area on May 6 after a gap of two months.
It is now almost 28 percent from its all-time high thanks to Thursday's sell-off, which took the Nifty50 to its lowest closing level in more than nine months. 
Is it an opportunity to turn to bottom fishing in a disciplined way? 
Market expert Ajay Bagga feels there is still more pain left in the market.
His advice: Invest in equal lots over the next six months.
"There will be bounces but liquidity is going out sustainably from the market. Valuations will contract and smallcaps will bear the brunt," Bagga told CNBCTV18.com.
His remarks come days after LIC's initial share sale — the biggest ever in the country — concluded with strong participation from retail investors, and sustained foreign institutional outflow is in its eighth month with no sign of receding.
Some fear it may not be a bottom so soon.
Deepak Jasani, Head-Retail Research at HDFC Securities, took the example of the BSE Smallcap index — which tracks more than 900 stocks — highlight that smallcap stocks have lost much more altitude from the top to the bottom in the past few years.
"First, the Nifty will have to bottom out and later, the midcap and smallcap indices will," he said.
He suggests staggering the smallcap purchases over the next 3-6 months.
How to take your pick
Here's his checklist on how to go about selecting stocks:
  • Check growth in sales and profits over the last three years
  • Check if the valuation has fallen sufficiently since October 2021 (when the market broke the last of a series of records)
  • Go for companies able to grow topline and bottomline even at a slow pace, and gain market share in adverse times
  • The focus on smallcaps comes at a time when the Street is seeing a period of persistently high volatility once again as fears of receding global growth, aggressive rate hikes, elevated consumer prices and overheated valuations continue to batter market sentiment. That on top of increasing COVID infections in parts of the world and the ongoing war in Europe.
    Yash Gupta, Equity Research Analyst at Angel One, believes volatility is here to stay in the market for the next few months, but nonetheless, one can use this opportunity to pick stocks. He remains positive on the longer-term growth potential of the economy.
    Others feel it is perhaps best for investors to stick to largecaps for now.
    Largecaps are better placed to handle the current situation in the market due to the scale and pricing power advantage, Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities, told CNBCTV18.com.
    "In a falling market, investors sell midcap and smallcap stocks faster to avoid liquidity issues later," he said.
    Should you still want to pick from the segment, he suggests only looking at businesses with strong demand prospects, low pricing pressure and a high entry barrier.
    His word of caution:
    • A lot more pain is left in smallcap and midcap stocks
    • Investors need to be selective
    • Wait for a good entry point
    • Want some ready-made smallcap picks to begin with? Here are some of the top smallcap ideas shared by the analysts:
      Chouhan is positive on Mphasis, JSPL, Aegis Logistics, Sumitomo Chem and IndiaMart for the long term.
      Gupta has three favourites at the moment: Ramkrishna Forgings with a target of Rs 256, Sobha with a target of Rs 750, and Stove Kraft.
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