Sharpening your smallcase: Insights into Our Recent Rebalancing  – Jun 2024 Edition

Windmill Capital’s smallcases have recently been rebalanced. This past quarter, the momentum factor emerged as a standout performer, significantly influencing the success of our strategies. As stock markets continued their upward trajectory, buoyed by the widespread anticipation of the BJP’s return to power, the smallcases focusing on momentum strategies, such as Value & Momentum and Growth at Fair Price, delivered better results than others. The bullish sentiment in the market has amplified the impact of these momentum-focused smallcases, demonstrating their potential to capitalize on prevailing market conditions.

Let’s find out which stocks have been added to and removed from the smallcases, and the reasons behind these changes.

Value and Momentum smallcase

The Value & Momentum smallcase seeks fairly valued companies whose reported Earnings Per Share (EPS) for the previous financial year were greater than analyst estimates. To shortlist fairly valued entities, this smallcase selects only those companies whose PE ratio is lesser than the ratio of the industry in which the company is operating. This smallcase only selects companies whose recent price rise is higher than the rise recorded by the Nifty 50 index. 

All of the companies that were dropped from the smallcase failed to beat the analyst estimate criteria. In addition, Minda Corporation, Marksans Pharma, and Oil India Ltd also failed the valuation criteria. Minda Corporation and PCBL Ltd also failed the momentum criteria.

CANSLIM-esque smallcase

The CANSLIM-esque smallcase incorporates both fundamental and technical analysis techniques and aims to identify growing companies. This smallcase only includes stocks that have been able to record high EPS growth in recent years and are expected to continue to grow their EPS. In addition, only stocks with high return on equity and witnessing momentum will be shortlisted. 

Three of the four stocks we dropped failed the momentum criteria. Safari Industries, Sonata Software, and Global Health all failed the momentum criteria. Arvind Ltd was dropped as the company recorded EPS degrowth during the most recent financial year. 

Growth at a Fair Price smallcase

The Growth at fair price smallcase only selects profit-making companies that have been recording significant growth in earnings per share over the medium term. In addition, these companies should have high Return On Capital Employed. Low PE in comparison to peers and momentum are the other factors. 

Both EIH Ltd and Electronics Mart India failed the value criteria whereas Maharashtra Seamless failed the momentum criteria. Gokaldas Exports, J Kumar Infraprojects, Minda Corporation, PCBL Ltd and Titagarh Rail Systems were all dropped as they failed the ROCE criteria. 

Quality Smallcap Smart Beta smallcase

The Quality Smallcap – Smart Beta smallcase selects only those small-cap stocks with high-quality scores. Additionally, the smallcase only selects those quality smallcap companies whose prices are experiencing a positive momentum trend.

While Zensar Tech and Castrol were dropped because they failed the momentum factor, the quality factor was Chennai Petroleum’s undoing. 

Straight Flush smallcase

The Straight Flush smallcase uses growth, quality, and valuation criteria to shortlist stocks. EPS growth rate, PE ratio, debt-to-equity ratio, free cash flow, and return on equity are some of the aspects considered when shortlisting stocks. 

Route Mobile and Sonata Software were dropped because they failed fundamental criteria associated with free cash flow and EPS growth. KEI Industries did not meet the valuation criteria. Both Praj Industries and Nesco were dropped as their earnings growth forecasts were unavailable at the time of rebalancing. 

The following smallcases saw no changes in the constituents: Low Risk – Smart Beta smallcase, Brand Value smallcase, and Speciality Chemicals smallcase.

Managing Volatility: The Importance of Wealth Protection

The markets have been extremely volatile, so it’s important to note that while some smallcases have performed better than others, it’s wise to have a layer of protection in place. How can you do this? We offer an asset allocation version of four of the aforementioned smallcases. These smallcases are suitable for those who want to benefit from the fast-moving nature of smallcases while also having the added protection of asset allocation to safeguard against prolonged market downturns. This version of the smallcases reduces fluctuations in portfolio value while providing a smoother wealth creation journey.

Understanding Our Model-Driven Approach

For our model-based smallcases, the selection and weighting of holdings are driven by a robust quantitative framework. This data-driven approach analyzes various factors specific to the model criteria to select only those companies that meet the criteria. You can read about the specifics of the model here, our rebalancing decisions reflect its optimized output.

Thank you for your continued trust!

As always, we remain dedicated to continuously refining our strategies and providing clear communication to empower your investment decisions. Thank you for partnering with us on your financial journey.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.

Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.