MASSIVE 62% Growth in SMALLCAPs: Smallcap Stocks - The Hidden Gems for Wealth Creation | Rahul Jain

Summary

Highlights

• Small-cap stocks have delivered a remarkable 62% earnings per share growth over two and a half years 🚀.
• Institutional stakes in small-cap stocks provide assurance due to the due diligence done by these entities 💼.
• Debt-to-equity ratios help in determining a company's financial health and leveraging power 💪.
• Trustworthy management is critical as mismanagement can go unnoticed in small-cap companies 🤔.
• Ensure sales and profit growth surpass sector leaders when choosing small-cap investments 📊.
• Liquidity checks prevent investors from being stuck with unsaleable stocks during market downturns 📉.

Key Takeaways

• Small-cap stocks have shown impressive growth rates, outperforming large-cap ones by a significant margin 📈.
• Investments in small-cap stocks should be made considering institutional stakes for better assurance of the stock's potential 🤝.
• Debt-to-equity ratios play a crucial role in evaluating the long-term viability of a small-cap company ⚖️.
• Quality of management should not be overlooked, as it significantly impacts a company's growth and trustworthiness 👨‍💼.
• Liquidity is essential to ensure ease of trading small-cap stocks and avoid getting trapped in low-volume trades 🔄.
• Continuous learning and cautious analysis are key when dealing with small-cap investments to maximize returns and minimize risks 📚.

Overview

MASSIVE 62% Growth in SMALLCAPs: Smallcap Stocks - The Hidden Gems for Wealth Creation | Rahul Jain Transcription

• 00:00 - 00:30 hi friends let's start this video on a positive note have a look at my screen and you will see that between December 2021 and September 24 small cap stocks have delivered much better earning per share 62% growth in the last 2 and a half year versus large cap stocks that have delivered 30% earnings per share growth and as a result of this growth what has actually happened is that a lot of money has gone into small cap stocks and we can see that in this data point here where the AUM of small cap mutual
• 00:30 - 01:00 funds have gone very close to the large cap mutual funds because naturally when the earnings growth is there in the small cap stocks money is likely to flow there and that's what precisely has happened here but at the same time what has actually happened here is that there has been a overflow of money into small cap and if you remember 6 to 8 months back sebi came out with a statement that there is a froth in the small cap space Also RBI indicated that there is a fro or the valuation concerns in the small cap stocks and as a result within hours and few days the small cap stocks
• 01:00 - 01:30 started to crash and tumble like anything and a lot of retail investors started to lose money in small cap stocks in fact in the last 6 to 8 months if you have lost any money in small cap stocks please let me know in the comments because it's a realization for you as well that where is your portfolio taking the biggest hit so is it small cap stocks which stock and what sort of bad decisions you might have made let me know in the comments I would love to read your comments pause this video share your experience about small cap Stock Investing in the comments because in this video what I'm going to do is in this video I'm going to teach you how to
• 01:30 - 02:00 differentiate a bad quality small cap stocks and a good quality small cap stocks this type of content not many people are able to create because here I'm practically going to share examples of stocks and what to look out for in small cap investing if you don't know me my name is Rahul Jan I'm a full-time investor and a full-time content creator like this video let me know in the comments a simple thank you also if you want to practically learn Stock Investing personal finance mutual funds ETF Etc consider joining my YouTube member Community because I share very
• 02:00 - 02:30 insightful exclusive content for my members almost on a daily basis you're going to learn a lot the feedback of this community has been excellent simply go to my channel press on the join button or you will find the link in the comments with that let's go to check number one that we must do if you're picking up any small cap stocks so the first check that we need to do is how much is the institutional stake held in that particular small cap store so have a look at my screen we are
• 02:30 - 03:00 going to take a practical example what do you see here that between December 21 to almost March 2023 if you look at the FI Stakes or if you look at the DI Stakes they are almost non-existent Stakes by fi and Di and if I show you the price chart between the same period which is December 2021 and March 2023 if you look at this data here so Jan 2022 or December 2021 almost if you go and up up to March 2023 here you will see that the stock has not moved at all this was
• 03:00 - 03:30 absolutely the bad time to invest in this particular stock why because FIS and dis did not have any stakes in the small cap stocks and the reason to buy a stock when FIS and Di have the stake is because FIS and di do a lot of due diligence they do a lot of wetting about the management of the company about the structure of the company a lot of things about company that you as a retail investor either will not have time or will not have the expertise to do therefore please make sure before you
• 03:30 - 04:00 invest in any small cap stock there is some level of fi and Di stake in that now again I'm going to expand this example and show you what exactly happened here so now if I come back to this and show you that in the month of June 2023 first time fi picked up 3.47% stake in this particular stock and as soon as that happened you see the stock prices started to go back up because fi started to buy the stake and the company started to getting noticed in the market now if I show you B September 2023 and
• 04:00 - 04:30 September 2024 the last one year not only fi Stakes have gone up but also the DI started to buy that now the total Stakes you see is almost 133% 8 + 5 133% of stakes have been owned by the FIS or di as a result if you see the stock prices have gone like crazy here again I'm not giving you the name of the stock because it does not really matter what stock chart we are looking at what really matters is the core concept and I'm using this as an example to drive home important Point here and the point
• 04:30 - 05:00 is that when the FIS or di have held almost 5% 6% of the stake in a small cap stock that is The Sweet Spot to try and analyze that particular company from various other prospects but that's already a very very good big tick about that stock that there is a lot of wetting that has happened and also if you want to buy a stock when the FIS and Di have got already 20% of stake then the question is that this has already gone up right so the spot is not when
• 05:00 - 05:30 you have fi and DI St at like 20% switch spot is when you have around 5 to 6% of buying done by fi and Di and also the most important point you need to understand is that you need to look for the reputed FIS and Di because nowadays there are lot of shell companies being opened offshore companies being opened you have to make sure that you're looking at those fi and Di name that are reputed and what you can do is simply look at the FI name and the DI name go and do Google about it read about the FI and Di that itself will do some
• 05:30 - 06:00 automatically ticks on that particular company of course we will do our own research I'll also talk about few other checks as a minimum we need to do but this one check is a good starting point in my view if you like this point hit the like button let me know in the comments a simple thank you while I move to the next point now comes the second extremely important check which is debt to equity ratio which is also called The Leverage risk have a look at my screen and you will see seven small cap companies here none of these are recommendations but the point here is that if you look at at their debt to
• 06:00 - 06:30 equity ratio here lower the debt to equity ratio is better the quality of the company is I'll come back to these seven companies in a minute but I really want us to understand the concept first so have a look at my screen you will see here that this data was as of December 2021 but that doesn't really matter for the core concept I want you to learn here what you note here is that 35 small companies in the last 10 years as of December 2021 got either acquired or got delisted so the mortality rate of small cap company is relatively higher than
• 06:30 - 07:00 the small cap or the midcap and one of the key reason is higher leverage risk or the higher debt because if a small cap company has taken a lot of debt what is likely to happen their interest payment is going to be really really high and when the interest payment is higher their profitability will come down they will have less cash generated with the business they will not be able to expand so if I were to pick from two companies which are growing at the same earning rates but the debt to equity is lower in one of them then I'll go with that now now how to go about checking
• 07:00 - 07:30 debt to equity ratio very very simple have a look at this screen now seven small cap companies one thing that we need to make sure is that these companies should be of the equal size in terms of market cap so for example all these companies are between 7,000 to 10,000 crores of market cap so similar size why does the size matter here because the companies like Reliance or adani they can afford to have for example higher leverage risk they are the big corporates but when you are comparing debt to equity ratio please make sure you are comparing Apple to Apple not Apple to oranges so the market market cap is of the similar range so
• 07:30 - 08:00 that's what I've done here second important thing is I've seen people comparing debt to equity ratio of one company from one sector and second company from second sector no please don't do that that to equity ratio profile will change from sector to sector so make sure that you're checking within the same sector so for example all these companies are into the energy sector and that is where you go and check the debt to equity ratio now again it's not that you just check the debt to equity ratio there are a lot of checks so for example we talked about the fisd the second check is the debt to show now
• 08:00 - 08:30 let me move to the check number three the third check is the quality of the management extremely important point when it comes to small cap stocks because if a fraud is committed by the management then in small cap companies sometimes it may go unnoticed while in case of large cap companies things come out very very clearly in the public domain we know examples of large cap companies I'm not going to stress on those but I want you to learn quality of management from two recent practical examples that you need to know number one is map my India you might be knowing what has happened but let me give you 30 seconds some here that the company
• 08:30 - 09:00 operates in three segments one is B2B second is b2c third is B2B Toc again I'm not going to explain all these three to you but the point is that their CEO Rohan Verma all of a sudden announces that we are going to create a new child company and this b2c division I'm going to take with me now the question is that who is going to own the new child company the management said that the 10% ownership will remain with the parent company while the 90% ownership will go to Rohan Verma the CEO and also so the parent company will have to subscribe to
• 09:00 - 09:30 35 crores worth of ccds it's like a funding that the parent company will need to do to the child company so on one hand you are taking funding of 35 CR from the parent company putting it to the child company but when it comes to ownership you're only giving 10% to the parent company meaning the existing shareholders of the parent company is only going to get 10% equity share in the child company while they have been investing in the parent company for I don't know how many number of years so this was the problem here where the interest of shareholders ERS was not
• 09:30 - 10:00 kept in the mind of course later on when the investors started to shout about it the company had to reverse their decision of 35 cres of funding by the parent company but again the question is that did the management think about the right interest of the shareholders of course not and therefore would you invest in a company like this no matter how good the quality of the assets is is the question that you need to ask yourself the second example is miston Foods again you might be aware what has happened very very recently everything was cooked up in terms of the customers
• 10:00 - 10:30 so fake customers fake suppliers fake invoices fake revenues this being almost like 8,000 to 9,000 cores of market cap I think that's a very very small cap company allegedly the management and promoters committed the fraud I don't know how true is that sebi is investing in it the time will tell us whether who is right and who is wrong but the point is that the Integrity of the management is a crucial aspect now you may say that Rahul we don't know future in future who is going to commit fraud I absolutely agree we do not know who is going to commit fraud in the future but the point here is that at least when you're
• 10:30 - 11:00 picking up a small cap stock please read the history of the management you are likely to get some red flags if there are any and secondly there is also a concept of related party transactions again please read up about related party transactions if I explain related party transactions in this video this video is going to get really really long I don't want to do that I really want you to take this as a homework and read up about related party transactions and how to do these checks is what you need to learn at your end so far if you're with me request you to hit the like button
• 11:00 - 11:30 and also please subscribe to this channel I don't generally speak enough about subscribing to this channel but if you're learning please subscribe to this channel you are going to learn a lot in the future as well now coming back to check number fourth extremely important check which is that if you are picking a small cap stock please make sure that the sales growth and the profitability growth of that small cap stock is at least 10% higher than the sectoral growth or the leadership in that particular sector again let me give you an example for example TCS this is the biggest IT company not a stock
• 11:30 - 12:00 recommendation at all but I'm taking this as an example here what do you see here in the last trailing 12 month sales growth has been 5% profit growth has been 8% this is the number one IT company now you might say that Rahul the growth is not there it's only single digit growth please understand that this company's total revenues are standing at a run rate of 250,000 CR it is a massive massive base and you cannot expect a 25% sort of a growth in the companies like this and therefore if you want to pick up a a small cap company from this space for
• 12:00 - 12:30 example let's say a company that has got 5,000 crores of run rate in terms of the revenues if you want to pick that company what are you going to check you're going to Simply go and check the profit growth rate here the company has delivered 23% growth in the last 12 months but if you look at the sales here it is only 3% even if you look at 5year basis 4% would you invest in this company I would not practically invest in this company mainly because the top line is not beating the sectoral growth or the leadership growth because the whole reason of investing in small companies is the growth and if the
• 12:30 - 13:00 growth is not there from a past track perspective then what is the guarantee it is going to be there in the future unless there is a deal pipeline unless there is a futuristic looking movement in terms of the top line and bottom line you really do not want to invest in a small cap company that is not even beating the leaders which are at a very high base so hope this concept is very very clear look for a small cap company that is at least growing by more than 10% in terms of the sales and in terms of the earnings growth with that let's move to check number five which is the
• 13:00 - 13:30 liquidity check extremely important check that we need to do in small cap stocks for example let's say you buy a small cap stock it has gone up let's say by 100% you're smiling very happy days but all of a sudden the market starts to correct and this stock start to come down and you want to now book The Profit sell it off and what do you find every day morning you go and try to sell it off but the stock is at the lower circuit or there could be another situations where you are not able to sell because you're stuck in a small cap stock mainly because of liquidity problem so what is liquidity basically it is the volume that gets traded on the
• 13:30 - 14:00 exchange that tells you whether it is easy to buy and sell the stock or not now how to find this liquidity or volume data very very easy you can do go to nsse website for example here go to NC website click on advances and declines here you will see the companies that have gained the advance in terms of the pricing as well as decline or unchanged what you can do is you can download this report here so for example if I go to advances here and I simply say download this report here you can download this report in CSV right I have now
• 14:00 - 14:30 downloaded this report here and what you will note here is that I've got the volume as well as the value of the trade that has happened on a particular day now simply if you come down here you are going to note for example this company here again I don't know the company not a recommendation at all you will see that the volume has been only .27 lakhs the total traded value is 1 CR so if you already had a position of 5 lakh rupes or 2 lakh rupes or whatever you might find it difficult to sell because buyers are not there in the market another example here the total traded Valu is only .15 CR again these are the traps
• 14:30 - 15:00 that you need to avoid these are the simple basic checks you can go and do don't look at only one day of volume look at the last 3 days of average volume these are the things you need to look at when it comes to small cap stocks because what you don't want to do is get stuck and you're not able to sell has it happened to you ever let me know in the comments if that has happened with you already and you will Now understand why I'm stressing upon the liquidity check in this video so far I've talked about five checks it doesn't mean you only do five checks these are the five minimum checks at least I try
• 15:00 - 15:30 to do and this is what I teach even on my YouTube member Community I share some practical insights some practical learnings if you're not yet a member think about becoming a member because you're going to learn a lot over a longer period of time now out of these five checks which is the check that you liked the most let me know in the comments which is the check that you really think is the one that you never knew about is it all the five checks one of them please let me know in the comments your comments motivate me to come up with such content for you at zero cost like the video let me know in
• 15:30 - 16:00 the comments is simple thank you I'm going to see you in my next video Until then keep rocking