Understand micro-cap stocks and know the best ones you can invest in 2024
Investors and traders determine the size of stocks by ranking them according to their respective market capitalisation. To simplify, the Securities and Exchange Board of India or SEBI has categorised stocks into various segments. Large-cap stocks are the top 100 companies in market cap, followed by mid-cap companies that rank from 101st to 250th. The following 250 stocks are all small-cap stocks.
SEBI hasn’t provided an official definition for microcap stocks. They are generally considered stocks that do not reach the top 500 companies. These microcap stocks are often perceived as those falling outside the top 500 companies in the market. These stocks have a market capitalisation below Rs 5,000 crores with a few exceptions.
A small market capitalisation does not mean the company is not worth investing in. It means that these micro companies have the potential to grow in the market provided they run the business with innovative ideas to become one of the top companies. Investing in these companies can be a high-risk, high-reward investment avenue.
Micro-cap stocks are primarily found in the technology and biotechnology sectors, where emerging startups aim to establish their presence and innovation in the market. These companies often feature innovative products, disruptive technologies, or unique business models that can create significant value for investors.
The Nifty microcap 250 index consists of the top 250 companies excluded from the Nifty 500 index. The Nifty Microcap 250 index showed an impressive growth of 43% in 2023. So, investing at the right time in a micro-cap stop can be highly beneficial.
Micro-cap stocks are highly volatile because of limited liquidity, a smaller investor base, and susceptibility to market sentiment. This volatility can present opportunities for quick gains, but it carries the risk of significant losses if not cautiously approached.
Investing in small-cap stocks requires patience and is a high-risk investment due to its lesser-known status and volatility.
When investing in microcap stocks, look for catalysts such as new leadership, government support, expansion, acquisitions, or profitability achievements that can drive growth for microcap companies and their stocks.
The quality of management and an independent board makes a company more trustworthy.
They should maintain positive or improved cash flow over time. Microcap stocks with little to no debt can be considered for investing.
A consistently increasing operating profit margin is a positive indicator and suggests a promising investment opportunity. Here is a list of the top 5 small-cap companies that may provide good returns over the years:
VST Industries
VST Industries is a conglomerate headquartered in Hyderabad. The company is in the business of manufacturing and distributing cigarettes.
VST Industries is debt-free. It has an ROE of 31.9% and a healthy dividend payout ratio of 65.0%.
Bajaj Consumer Care
Bajaj Consumer Care Limited operates in the FMCG sector, primarily manufacturing hair oils and personal care products. The company is debt-free and has a 3-year ROE of 23.1%. It has a dividend payout ratio of 62.3%.
Swiss Military Consumer Goods Ltd
It is involved in the trading and marketing lifestyle products like travel gear, baggage, leather accessories, sunglasses, electronics, protective masks, and more under the SWISS MILITARY brand.
The company is nearly debt-free. It has had a profit growth of 57.3% CAGR over the past five years.
Waaree Renewables Technologies Ltd
Waaree Renewables Technologies Ltd focuses on power generation through renewable energy sources and offers related consultancy services. Waaree Energy is India’s largest solar panel manufacturing company and has a capacity of 12GW.
It has achieved a 261% CAGR over the last five years and has a 3-year ROE of 56.8%.
JTL Industries Ltd
JTL is a maker and supplier of steel tubes, pipes, and related products. The company’s product range includes ERW pipes, galvanised pipes, and solar structures.
It has 62.5% CAGR over the last five years, accompanied by a 3-year ROE of 33.5%. It has also had a sales growth of 19.0% over ten years.
In conclusion, micro-cap stocks have yet to attain the status of popular stocks. People may not know of these companies yet but they hold significant growth potential for the future.
Investment decisions must focus on individual stocks rather than the entire microcap segment when dealing with microcap stocks. That could lead to an over-diversification of risk within your portfolio, leading to a no profit-no loss situation. Each company mentioned above has a good growth potential and is likely to yield positive returns.
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