We all know a kid who remained at the bottom of the class long enough for people to lose all faith in his progress only to be surprised when he lands a great opportunity and is perhaps more successful in life than most peers.
Even in Indian equities, many in the small/mid-cap space are assumed to be underdogs till one fine day when an opportunity comes knocking and it hits one out of the park. True, one cannot simply generalise all small/mid-cap stocks to be underrated, but the ones that offer a massive wealth-creation opportunity along with business turnaround.
While Indian capital markets, along with other emerging nations, witnessed a difficult phase last year, bellwether index Nifty still managed to climb to an all-time high last month but the small-caps at the bottom of the market-cap was unable to keep pace. At the time of writing this NIFTY50 has delivered a one-year return of ~3% but the NIFTY Smallcap 100 recorded a steep -16% decline and NIFTY midcap 50 slumped by almost 7% for the same period. The valuation polarization is too sharp. We look at mid and small-caps creating new bottoms and the basket dragging quite a few high-quality stocks along – this pushes them into the undervalued zone.