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Treasure Hunt in Hidden Gems

It pays to invest in the stocks of the small companies although the stocks of small companies are seldom on the radar of any investor’s list but still they can give great returns if they are chosen with care. As the chances of returns are high so also the chances of looses. The small cap stocks are usually never monitored by the market analysts, that is why the true value of the good small cap stocks can remain in the oblivion undiscovered and untapped for a long time and thereby making investments in them a bit risky and on the contrary even the returns of finding these hidden gems are tremendous because as such the small cap stocks may become middle caps and be on the way of becoming large caps too!!!!! Thereby giving great returns just like a plant turning into a huge tree in a course of time or the bamboo tree which shoots up to a staggering height in no time. The small caps stocks have a low equity base obviously due to which selling and buying takes more time. Exit from buying a wrong stock is usually a bit difficult. 

The governance, dividend policies and the professionalism in the small companies are comparatively weak which increases the risk factors. In the tough times the big companies sail through where as the smaller companies take the brunt. Mostly the small companies are battling with the high borrowing costs, low demand, power and manpower shortage or hassles long with high wages and commodity prices, some such companies are under stress to sell assets to pay off loans or else pledge shares to raise funds. The other factors the small companies face are the currency volatility and the competition faced by the low cost imparts from China. 

So it is imperative that you must analyze that as for how long the promoters have been in the business or if they are backed by a strong team. However the retail investors have no option but to rely and depend on the research reports. If the promoters stake is high than it clearly indicates the high confidence in the business he is involved in. The other factors which through the light on the small caps are the promoter’s holdings, shares pledged, debt-to-equity and return on equity and the high debt figures indicate that the interest outgoing is on the higher side thereby causing company to drag and slowdown in growth or in other words prove to be a drag. If the company is having unique products and services than in the absence of the competition company can exercise its powers of pricing. 

If the institutions have brought stakes of the small caps than these stocks deserve second look. There are some 500 plus stocks available for the trading in the BSE small cap index and approximately 11% are from the capital goods sector and the finance sector, housing sector 10% metal and mining are around 5% respectively. So in terms of long term investments investing the hidden gems would truly prove to be a Treasure in disguise.