Almost half of Nifty Smallcap stocks are trading 20-42% below their 52-week highs. What should investors do?

Investor interest in small-cap stocks is gradually waning on Dalal Street, as many of them are now trading well below their recent highs. This decline in enthusiasm comes after a period when small-cap stocks had attracted enough attention, pushing their valuations to higher levels.

In recent years, small-cap stocks have benefited from strong investor sentiment, pushing their valuations higher and making them particularly attractive to market participants looking for growth opportunities. However, the current environment reflects a change in sentiment, with many investors engaged in profit-taking as new catalysts to support further gains remain scarce.

Indian companies’ weak earnings estimates for the quarter ending in September, combined with rising geopolitical tensions and significant selling pressure from foreign portfolio investors (FPIs). Currently, pressure on small-cap stocks is increasing,

Notably, stocks from defense and railways sectors, which had experienced huge growth and substantial rallies in the first half of the current year, are now facing weak market demand. As a result of this change, these shares are trading at much lower levels than their recent peaks.

been an analyst Concerns are being raised over the heavy valuations of small-cap stocksWhich had attracted strong retail investor interest due to its appeal as a more affordable alternative to large-cap stocks. The promise of benefits from increasing capital expenditure (capex) has also contributed to significant growth in the sector.

However, many investors are now reevaluating their positions in these stocks.

46 Nifty Smallcap 100 stocks fall up to 42% from recent highs

According to Trendline data, 46 stocks of the Nifty Smallcap 100 index are currently trading at a discount of 20% to 42% from their recent 52-week highs. Remarkably, CreditAccess Rural has led this decline, showing a significant decline of 42% from its peak.

In the defense sector, Stocks like Garden Reach Shipbuilders, BEML and Data Patterns (India) have fallen up to 40% from their one-year highs.Similarly, railway stocks like IRCON International, Titagarh Rail Systems, RailTel Corporation and Jupiter Wagons declined around 39%.

In the banking sector, shares including Jammu and Kashmir Bank, UCO Bank, RBL Bank and Central Bank of India fell up to 36%.

Electric bus makers have also faced setbacks, with turnover at JBM Auto and Oletra Greentech falling 29% and 24.26% respectively from their one-year highs. Moreover, despite the recent correction in Angel One shares, the stock remains 19% below its one-year high.

Overall, the Nifty Small Cap 100 index is currently down just 3% from its October peak, indicating a less severe decline than that of large-cap stocks. This relative stability can be attributed to some counters within the index still providing support, highlighting mixed sentiment and diverse performance across sectors in the small-cap sector.

According to domestic brokerage firm Motilal Oswal, the market capitalization-to-GDP of large, mid and small caps is trading at historic highs, with small caps now overtaking midcaps.

“With midcaps and smallcaps holding strong over the past few months, we still believe that at current levels the margin of safety for these segments (in terms of valuations) has narrowed compared to largecaps. Keeping this in mind “The broader market may see a short-lived correction in some sectors in the near term and flows are likely to shift towards large caps,” Axis Secure said in its recent note.

Disclaimer, The views and recommendations expressed in this article are those of the individual analysts. These do not represent the views of the Mint. We advise investors to check with certified experts before taking any investment decision.