The small-cap stock market is making a notable comeback. Over the last 10 trading sessions, the BSE Smallcap Index has surged by nearly 10%, adding a remarkable Rs 7.3 lakh crore to investors’ wealth. This resurgence has caught the attention of many, particularly as standout performers like Nelcast and Cosmo First have skyrocketed by as much as 65%, while GRSE has climbed 55%.
Out of the approximately 980 stocks in the index, only 70 have shown negative returns. The remaining stocks have either seen slight increases or experienced impressive gains. In fact, 46 small-cap stocks have delivered returns of over 30% in just 10 days, including companies like TTML, IFCI, Angel One, Zen Tech, and Titagarh Rail.
### Key Factors Fueling the Surge
This recent boom is not just a result of technical trading; it is being fueled by strong policy support and robust order books in sectors such as railways and defense. Notably, events like Operation Sindoor have sparked considerable demand for defense stocks, further driving the overall rally.
According to Atul Bhole, a fund manager at Kotak Mahindra AMC, much of this surge is driven by the fear of missing out (FOMO), rather than a logical investment approach. He points out that while mid and small-cap stocks fell by 40-60% in 2024, they are now rebounding without a firm foundation to justify the rise.
Dheeraj Relli, Managing Director of HDFC Securities, adds that before this rally, small and mid-cap stocks underwent a significant correction, with many falling by 25-40%. This correction led investors to perceive value, especially in the railways, defense, and metals sectors. However, Relli warns that some stocks have become overpriced again and advises investors to be cautious and conduct thorough research.
### The Road Ahead: Caution and Strategy
LKP Securities’ technical expert, Rupak Dey, argues that only a select few high-quality stocks are driving this boom, while the broader market remains weak and could face pressure. He advises investors to be selective when choosing stocks, as this period is not as straightforward as the bullish trends seen in 2023.
Valuation concerns remain a point of contention. Some strategists believe that the high valuations in small and mid-sized companies are not as worrisome, given the improved profitability and growth prospects. However, Kotak Equities raises concerns, noting that many new investors have poured into small-cap and thematic funds over the last two years, without fully learning from previous market corrections. As a result, they may find themselves stuck with “narrative stocks” that lack solid fundamentals.
In conclusion, while the small-cap market is enjoying a moment of growth, investors should approach it with caution. As always, it’s wise to consult with a certified investment advisor before making any decisions.
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