Small stocks, big stocks

SMARTSHARE

Normal market rallies follow broad patterns. The upwards movement starts with low trading volumes.

Then the volumes suddenly multiply as the big institutional investors pump in resources. Then the small investors and small traders get into the act.

By the time the small players are fully committed, the big institutional investors become reluctant to buy more but not yet ready to sell off their holdings. The minnows keep things buzzing.

Finally, the big money books profits and pulls out, leaving the smalltimers to take losses. The market duly collapses.

The big danger sign is an obsessive interest in small and penny stocks on investor forums coupled to high volumes in small counters. The high volumes and the anecdotal attention on small stocks indicates that the small timer is well and truly hooked at this time.

Big players can't enter small stocks because their liquidity problems are exactly the inverse of the small investors'. Say, you, a small investor, have a total corpus of Rs 10 lakh and you park Rs 50,000 in a penny stock trading at Rs 5.

A month later, the penny stock hits Rs 15 and you sell out. Your return is a fantastic 10 per cent of total capital. A fund manager with a corpus of Rs 100 crore will not, however, waste his time chasing a mere Rs 1 lakh.

We are still seeing a lot of attention centred on large stocks. This means that the big money is not yet in passive mode. The FIIs have returned to the market along with the advent of monsoon clouds.

April and May saw net sales from the "firangis" but they have been net buyers to the tune of Rs 11-odd billion equivalent in June till date. Indian FIs have also been positive through June.

This is when it is most tempting to start trading recklessly. Big stocks are still paying off at the moment because the big boys are still very much in the market.

Small stocks are also paying off because the smalltimers are also in the market. If you can get in now with small investments and get out before the big boys head for the exit, you might make relatively huge sums.

If however, you mistime the exit, you will be left in the worst possible situation "" invested in stocks that are dramatically low in liquidity and short on value.

The fact is, small, low-priced stocks are often low-priced because there's something shady about the fundamentals.

There are investment scenarios where low-priced stocks are likely to see rapid re-rating and possess some safety as well. The best one is where the stock is a holding company in a profit-making group.

Such stocks can have huge assets sitting on the balance sheet and still not attract much attention. In such case, the book-value is frequently much higher than the market value.

For example, there's Consolidated Finvest (BSE:500226) which is a holding company for for the BC Jindal Group. It holds investments of 37 per cent and 67 per cent respectively in Jindal Photo and Jindal Poly Films.

The market value of its holdings is around Rs 430 per share according to one credible estimate. The stock itself trades at Rs 40-45.