Nearly half of the Nifty Smallcap shares are trading between 20% and 42% below their 52-week highs. What should investors do?

Investor interest in small cap stocks on Dalal Street appears to be gradually fading as many of them are now trading significantly below their recent highs. This decline in enthusiasm comes after a period in which small-cap stocks attracted substantial attention, driving their valuations to lofty levels.

In recent years, small-cap stocks have benefited from strong investor sentiment, driving up their valuations and making them especially attractive to market participants looking for growth opportunities. However, the current environment reflects a shift in sentiment, with many investors engaging in profit-taking while new catalysts to support further gains remain scarce.

Weak earnings projections by Indian companies for the quarter ending September, combined with escalating geopolitical tensions and significant selling pressure from foreign portfolio investors (FPIs), are currently putting downward pressure on small cap stocks.

In particular, stocks in the defense and railway sectors, which saw meteoric rises and substantial rallies in the first half of the current year, are now facing weakened market demand. This change has resulted in these stocks trading at significantly lower levels compared to their recent peaks.

The analysts have been raising concerns over high valuations of small-cap stockswhich had attracted strong interest from retail investors due to its appeal as a more affordable alternative to large-cap stocks. The promise of earnings from increased capital expenditure (capex) had also contributed to significant bullish momentum in this segment.

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

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

According to Trendlyne data, 46 stocks within the Nifty Smallcap 100 index are currently trading at discounts of 20% to 42% from their recent 52-week highs. Notably, Access to Grameen credit has taken the lead in this decline, showing a significant 42% drop from its peak.

In the defense sector, Stocks like Garden Reach Shipbuilders, BEML and Data Patterns (India) have fallen as much as 40% from their one-year highs. Similarly, railway stocks such as Ircon International, Titagarh Rail Systems, RailTel Corporation and Jupiter Wagons fell about 39%.

In the banking sector, stocks such as Jammu & Kashmir Bank, UCO Bank, RBL Bank and Central Bank of India are down up to 36%.

Electric bus makers have also faced setbacks, with JBM Auto and Olectra Greentech trading down 29% and 24.26%, respectively, from their one-year highs. Additionally, despite a recent rally in Angel One stock, the stock remains 19% below its one-year high.

Overall, the Nifty Small Cap 100 index is currently just 3% away from its October highs, showing a less severe decline compared to larger cap stocks. This relative stability can be attributed to certain counters within the index still providing support, highlighting the mixed sentiment and varied performance across different sectors in the small-cap space.

According to domestic brokerage firm Motilal Oswal, the market capitalization/GDP of large, mid and small cap companies continues to trade at all-time highs, with small caps now outperforming midcaps.

“With a strong rally by midcaps and smallcaps in recent months, we still believe the margin of safety (in terms of valuations) for these segments at current levels has narrowed compared to large caps. With this in mind, the broader market could see some temporary correction in certain sectors in the short term, with flows likely shifting towards large caps,” Axis Secur stated in its recent note.

Disclaimer: The opinions and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to consult certified experts before making any investment decisions.