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Kotak Equities warns many new investors in smallcap and thematic funds haven’t learned from past corrections, leaving them trapped in overhyped “narrative stocks”
Some strategists argue that high valuations in small and mid-sized companies are less concerning due to improved profit and growth. (Representative/Shutterstock)
The magic of small-cap stocks is back in full swing. Over the last 10 trading sessions, the BSE Smallcap Index has jumped nearly 10%, adding around Rs 7.3 lakh crore to investors’ wealth.
Notable performers include Nelcast and Cosmo First, which have jumped up to 65%, while GRSE has climbed 55%. Out of the roughly 980 stocks in the smallcap index, only 70 have shown negative returns. The rest have experienced slight increases or significant gains, with 46 stocks delivering returns of over 30% in just 10 days. These include companies like TTML, IFCI, Angel One, Zen Tech, and Titagarh Rail.
The Rally Isn’t Just About Momentum
The current boom is not solely driven by technical buying; policy support and robust order books in sectors such as railways and defence have also contributed to the stock surge. Recent events like Operation Sindoor have sparked significant demand for defence stocks.
According to Atul Bhole, fund manager at Kotak Mahindra AMC, the surge is largely driven by the fear of missing out (FOMO) rather than logic. He reminds investors that in 2024, mid and small cap stocks fell by 40-60% and are now rising again without a solid foundation.
Bounceback After Correction
Dheeraj Relli, MD of HDFC Securities, notes that before this rally, small and mid cap stocks underwent a significant correction, with many falling by 25-40%. Following this decline, investors began to see value, particularly in the railways, defence, and metal sectors. However, he warns that some stocks have become expensive again and advises against buying without thorough research, as not all stocks are strong.
The Gains Aren’t Broad-based
LKP Securities technical expert Rupak Dey believes that only a few quality stocks are driving this boom, while the rest of the market remains weak and could come under pressure. He advises investors to exercise caution in choosing stocks, as this period is not as straightforward as 2023.
Divided Opinion On Valuation
Opinions on valuation are divided. Some strategists argue that high valuations in small and mid-sized companies are less concerning due to improved profit and growth.
Seshadri Sen of MK Global notes that the P/E ratio varies by sector and profitability, which should be considered when evaluating whether stocks are overpriced. Conversely, Kotak Equities warns that many new investors have entered smallcap and thematic funds over the last two years without learning from previous corrections, leaving them stuck in “narrative stocks.”
(Disclaimer: The stocks mentioned here are for informational purposes only. If you wish to invest in any of these, please consult a certified investment advisor. News18 will not be responsible for any profits or losses incurred.)
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