These 10 multibagger small-cap stocks are trading below their five-year average P/E. Should I buy it?
Money managers have sounded a note of caution, saying risk-reward is still poor across many segments of the small-cap sector, but an analysis of valuations based on price-to-earnings (P/E) ratios shows that: Still, some multibagger companies are trading below their five-year averages.
ETMarkets’ analysis of stocks with a market capitalization of over Rs 1,000 crore shortlisted 10 stocks that have delivered mixed returns in the current fiscal so far but are still trading below their five-year average P/E.
Although P/E is the most widely tracked and used valuation method, investors should measure other key financial parameters of a company before buying or selling its stocks.
Neuland Laboratories, Quick Heal Technologies, Welspun Enterprises, PTC India Financial Services, ITD Cementation India, Responsive Industries, Indraprastha Medical Corporation, Anant Raj Ltd, Capacit’e Infraprojects and Mishtann Foods are these 10 stocks.
The selected companies are those with annual sales of more than 10 billion won.
So far in FY24, the S&P BSE Smallcap index has risen over 52%, outperforming the benchmark Sensex by over 34%.
Neuland Institute
The stock has been a standout performer in the healthcare space, providing investors with a 187% return in FY24 to date. The stock is trading at a trailing 12-month P/E of 24.9x, which is lower than its five-year average P/E of 28.6x.
Looking at the company’s performance, we’ve seen three consecutive quarters of revenue growth of more than 30% year-over-year, with profits growing multiple times over all periods.
Owned by marquee investors like Mukul Agarwal and Vijay Kedia, the stock has seen its holdings in mutual funds steadily increase. According to Trendlyne, MFs cumulatively held a 1.94% stake in the company as of the end of September, up from 0.79% in December 2022.
Welspun Enterprise
Shares of the textile company have delivered investors a return of over 172% in FY24 so far. Even after this rally, the stock is trading at a 12-month trailing P/E of 6.8x, which is lower than its 5-year average P/E of 8.09x.
While mutual fund participation in these stocks is quite low, foreign investors have been increasing their investments over the last three quarters. According to Trendline, their cumulative stake was 4.47% as of the end of September, a significant increase from 3.04% as of March.
ITD cementation
This year, road construction companies performed well thanks to significant growth in the infrastructure sector thanks to government investment.
ITD Cementation stock has returned over 170% so far in FY24, but the stock trades at 26.98 times its trailing 12-month P/E.
This is lower than the 5-year average P/E of 29.38 times.
The rise in stock prices appears to have been supported by foreign inflow. This is because the large bull market increased its holdings for two consecutive quarters. The average target price of Rs 297 suggests that the stock could see about 5% more upside from current levels.
Anant Raj Ltd
Considering the strong demand environment despite high interest rates, real estate is one sector that has seen a significant rebound. This has also been good for stocks, converting many multibaggers, Anant Raj Ltd being one of them.
The stock has delivered investors returns of nearly 128% so far in FY24 and is still trading below its five-year average P/E.
In the September quarter, the company recorded a 79 per cent rise in revenue to around Rs 60 crore and a 28 per cent rise in revenue to Rs 341 crore.
What should investors do?
Looking at the overall valuation of the small-cap sector, money managers may consider switching to large-cap stocks as they consider them expensive.
“Current valuations show that small and mid-cap stocks are overpriced relative to their long-term trends. The risk reward of large caps looks better,” says Sonam Udasi of Tata Asset Management.
As we move into 2024, there are money managers like Shridatta Bhandwaldar of Canara Robeco MF, who also believe that large-cap stocks can outperform small-cap and mid-cap stocks.
However, Capital Mind’s Deepak Shenoy continues to believe that small and mid-cap stocks will lead the market rally in the near term, given robust domestic liquidity.
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(Disclaimer: Recommendations, suggestions, views and opinions provided by experts are their own and do not represent the views of The Economic Times.)
