Smallcap stocks unlikely to enter the bear market soon, shows data

The Nifty Smallcap 100 index has declined 12.6 per cent from its peak in February. A fall of more than 20 per cent is seen as a bear phase. However, ICICI Securities (ISec) analysts don’t expect the correction to deepen much. 
 

“Empirical evidence indicates that the trigger for bear markets within smallcaps has historically emanated from being in a high valuation zone, followed by a slump in economic growth or ‘monetary tightening cycle.’

Both of these appear unlikely now, given the recent gross domestic product (GDP) upgrades for India and benign interest rate outlook,” said ISec strategists Vinod Karki and Niraj Karnani, in a note. Amid the turmoil in the smallcap space, ISec believes stocks with high earnings yield and price/earnings-to-growth (PEG) ratio would offer better margin of safety. 
 

The PEG ratio takes into account valuation of a company in relation to its earnings growth. It is calculated by dividing P/E by projected 12-month forward earnings forecasts. Earnings yield (EY) is calculated by dividing earnings per share with the latest stock price.

The brokerage has screened stocks with EY of more than 5 per cent and PEG of less than 1.5 times. It has shortlisted close to three dozen stocks that meet these parameters. Utkarsh Small Finance Bank, Shyam Metalics, Karur Vysya Bank, Mahanagar Gas and Gulf Oil Lubricants are some of the top picks based on this screener.