By Vivek Kaul – Vivek Kaul’s Inner Circle (France) –
Small cap companies have always held a certain fascination for investors.
By virtue of their higher growth potential, they can at times generate outstanding returns…or so the story goes.
While India may be a bright spot in a world struggling for growth, it has been in an economic slowdown for some years. FY10 was perhaps the last year the economy turned in a robust growth rate.
So, just how well have the smaller companies been faring in this environment of slow growth? Are they just as equipped to deal with a slowdown as they are with brisk growth?
Smaller companies, though known for their higher growth potential, can be quite shaky during an extended patch of cyclical downturn.
This amply shows the importance of picking out fundamentally sound businesses in this space.
Not all small companies are weak, but many are.
Carefully zoning in on the former kinds can be a make or break here.
The BSE Small Cap Index is trading at a price to earnings (P/E) multiple of 93 times. That’s far above the BSE Sensex’s P/E of 21 times.
Over the last one year, the small cap index has trumped large cap returns by 13%.
Should you avoid investing in small cap stocks when the index P/E is sky high?