Small Cap Stocks. Should you invest in it during a falling market?

"One Small Cap Stock Soared 32,798% Turning Rs 15,000 Into Rs 4.9 Million!"
Do you yearn to know about Small Cap opportunities like that?

Dear Profit-seeking investor,
You may remember the days, not so long ago, when putting as much money as you can into small cap stocks was a fad among investors.
It worked like crazy for a while... with many people dumping every penny they had into small caps and making huge returns quickly as a result of it.
But soon the markets started falling and the small cap game became a lot, lot harder.
Under-prepared and under-informed investors could no longer take small caps casually like they used to. And many of them found this out the hard way when they lost money awfully fast in small cap stocks.
Simply put, for most investors the game was up.
Soon cries echoed from all across the investment community about how "Small Caps are Dead", "Small Caps are Worthless" and "Small Caps are Finished"...
And they probably had a point. The game had gotten a lot harder.
But...
While most people were busy complaining and griping about this, some investors had knowingly or unknowingly discovered the secret to making 1,000% or more returns from small caps... and they were silently working their way towards it.
These investors were totally unfazed by the market changes because they knew they’d earn their profits regardless of whether the market went up, down or remained flat.
Would You Like To KnowThat Secret Too? Sure, I’ll tell you in just a moment. But first, there are a few FACTS that you need to know.
As you may know already, small caps have performed poorly in the last few months. And it has unfortunately led many investors to the conclusion that the 15 minutes of fame for small companies are over.
This is far from the truth!
The continued fall in the prices of small caps was triggered by a panic sell-off that started in the broader market due to the impact of financial crisis in the US.
So, ALL small cap stocks across ALL sectors had crashed without discrimination.
Second... while small caps fall fast in general, they also rise equally fast.
Here are some randomly selected Small Caps stocks that prove this point (one stock we recommended is also in there)...
Small caps' fall is fast... and so is the rise
Returns (%)
Aug. to Oct. 2008
Nov. 2008 to Jan. 2009
Hindusthan National Glass
- 57.2
105.0
Jindal Poly Films Ltd.
- 50.2
91.9
Karuturi Global Ltd.
- 73.7
83.6
Madras Aluminium Co. Ltd.
- 67.4
64.4
Indo Tech Transformers Ltd.
- 38.5
61.4
Source: CMIE Prowess
Clearly, small companies are fast growers and it shows in their stock prices. And the best part is... small caps have the potential to be 10-baggers also!
Some of the unique advantages of owning small cap stocks are:
1. Small companies adapt fast to changing environment - they are nimble and can therefore move fast
2. Given low liquidity, while retail investors can buy small caps, many fund managers cannot - so retail investors like you have a first mover advantage with a good small company
3. Small caps are high in demand but less in supply - that means prices rise really fast when demand increases
However, there is one drawback when it comes to small caps..
While The Potential to Make Returns Is Huge, So Is The Risk Involved... The problem is that many people don't understand this. Or they understand it but don't take it seriously.
Smaller companies typically have fewer competitive advantages and financial resources to weather a market downturn. So, naturally, when there is a sell-off in the markets, small caps bear the brunt of it as they are more "risky" to hold.
And because of the size of small caps, it doesn’t take much money to drive their stock prices down faster.
So What Should YOU Do Now?Since the markets have crashed, should you start shifting all your money from small caps to government bonds, provident funds, post office deposits, fixed deposits, and large-cap stocks?
You might have been told by others that it's the best thing to do right now.
But my answer to that would be - No, definitely not!
You see, while most stock brokers and investment firms push small caps as a way to make big returns in a short time, we believe they're as an extremely good "long term" investment.
Small caps have been proven to post better returns over the long run than large caps - returns often in excess of 1,000% over a 10-year period.
You don't have to take my word for it. Here are some real examples...
Small cap wonders
Market cap. (US$ m)
Then
Now
Returns
Sector
Pantaloon Retail (India) Ltd.
1.6
526.1
32,798%
Retailing
Matrix Laboratories Ltd.
2.3
272.4
11,681%
Healthcare
Mercator Lines Ltd.
1.3
133.7
10,141%
Shipping
Havells India Ltd.
2.8
136.8
4,848%
Consumer / Electricals
Sintex Industries Ltd.
18.4
382.4
1,977%
Plastic / Textiles
Blue Dart Express Ltd.
9.8
202.2
1,961%
Logistics
Hindustan Construction Co. Ltd.
12.2
232.6
1,809%
Construction
Blue Star Ltd.
24.3
273.7
1,025%
Engineering Services
Titan Industries Ltd.
86.4
838.4
870%
Retailing / Durables
Pidilite Industries Ltd.
65.8
501.1
661%
DiversifiedSource: CMIE Prowess and Trend; Then - 31st December 1998; Now - 30th January 2009
Let's say you had invested just Rs 15,000 in Hindustan Construction back in 1998. You'd have easily made almost Rs 286,422 by now.
If you had invested Rs 15,000 in Pantaloon then, you'd have made around a whopping Rs 4,934,694 now!
So, adding a few small-cap stocks in your investment portfolio is one of the surest ways to multiply your wealth...
And That's What We Intend To Help You Do Correctly... Hidden Treasure was launched in Feb. 2008 with a view to provide profitable Small Cap recommendations.
But "profitable" doesn’t necessarily mean 327% returns in one week.
We have always said and still say that you should look at small caps from the long term perspective.
The stocks we recommended through Hidden Treasure are strong companies and we recommended them not because we believe they will flourish in a year or two, but over a period of 4 to 5 years.
No doubt, the market pressure is going to keep the small caps down for some more time.
Still, if you buy the stocks that we recommend right away... for dirt-cheap, you can expect them to deliver good returns over the recommended timeframes.
So this is an opportunity to...
Grab Reliable Small Companies For Ridiculously Low Prices Did you ever find yourself thinking, "I wish I had invested in Blue Star while it was still young"? Or in Titan for that matter.
These companies have grown rapidly in the last decade to become household names today.
But there was no way you could have known... until now...
Through Hidden Treasure we're providing you opportunities like that today.
The stocks we reveal through Hidden Treasure are companies that are either under-researched or not covered by other stock brokers and research firms.
There's no other authentic source of long-term recommendations on such companies. And whatever else is available is biased.
I know that small caps don't comprise a big portion of your portfolio. Probably 10% at the most.
But that doesn't mean you don't need to bother about them at all.
This small part of your portfolio does the KEY job of maximizing your returns...
That's Why You Need To Be EVEN MORE Careful While Picking Your Small Cap Stocks Considering the irrational stock market we’re currently in, I’m sure you’d be elated if 2 out of 5 small cap stocks that you owned did well.
We have done even better!
The results of 7 of the 12 small cap companies we recommended are in line with our estimates so far. This has been achieved in an environment which has not been good for business.
The other companies recommended by us have also done well, though not in line with our projections.
We continue to believe that over the recommended investment horizon they will deliver the performance we were expecting to begin with.
But if even that doesn’t convince you, here’s something that will...
You probably know of our Large Cap recommendation service Stockselect.
Stockselect has a great track record since 2002. Even the recently recommended stocks have done very well.
That’s why we have MANY Stockselect subscribers who have been with us since the day we launched it. Here’s what one of them has to say...
"I realized the value of fundamentals only after I started using Equitymaster"
I am a subscriber to these services for the past five years. I realized the value of fundamentals for investment decisions only after I started using the services of equitymaster.com.
Earlier, my decisions used to be based on "tips" or "advice from friends" etc.; Equitymaster taught me to base them on business fundamentals.
One very good quality of your organization is that I never have even 5% of doubt about your unbiased approach and your integrity to the retail investors.
Overall, I value the services offered by Equitymaster and I acknowledge their contribution to make my investment decisions more scientific.
- Satish Pendse, a StockSelect Subscriber
Now the thing is...
We follow similar practices to decide on valuable small cap stocks also.
Hidden Treasure is only one year old now. So I’m sure that by the time it has completed 4-5 years, we will have similar testimonials for it also.
And There’s One Other Thing You Probably Didn’t Know... Why do you think we send out only one small cap recommendation per month through Hidden Treasure?
Stockselect subscribers get one large cap recommendation EVERY WEEK. Then why only one Hidden Treasure per month?
It’s because good small companies are extremely difficult to find and Equitymaster analysts have to go through many more hoops to find the few gems that exist... just for you.
And get this - it's OUR reputation at stake here.
To make sure our recommendations are accurate, we also have to meet with the managements of different companies and organise trips to various cities every month.
All this takes time, therefore just one report a month.
So what I'm saying is... we will continue to find hidden treasures that have capabilities to make attractive returns for you in the future.
But considering the risks that small companies carry, you should realistically not expect each and every recommendation to be an out and out winner.
Agreed?