What are the top Small Cap Stocks to Invest in 2023?

The current rally in the Indian stock market has been characterized by an impressive resurgence of smaller companies. As of 17th July 2023, the BSE Small-cap Index has grown by approximately 29%, soaring from 26159 points on 28th March 2023 to 33,986.98 points. This resurgence demonstrates the investor confidence in the growth potential of small-cap stocks, spurred by their robust earnings performance and the overall optimism in the market.

Conversely, the BSE Large-cap Index has grown at a slower pace, posting a growth of approximately 16% over the same period. Large-cap stocks, typically seen as relatively stable investments, may be experiencing less dramatic growth due to the investors’ shift towards higher-return potential small-cap stocks.

What are Small Cap stocks? 

In the diverse landscape of the Indian stock market, the Securities and Exchange Board of India (SEBI) categorizes firms with a market capitalization below Rs. 5,000 Crore as Small Cap companies. Surprisingly, such companies, making up over 95% of all Indian firms, demonstrate the dynamism of our economic structure. Often ranking beyond the 251st position in terms of market capitalization, these companies tend to excel in the early phases of economic revival. Their publicly traded shares, known as small-cap stocks, could be the potential key to growth. If you are considering incorporating small cap stocks into your investment strategy, it is beneficial to understand their nature, factors to consider when selecting smallcaps and associated risk factors.

Why Consider Small Cap Stocks

Small cap stocks are a category of stock investments that consist of stocks from smaller companies. They possess distinct characteristics that set them apart from large cap and mid cap stocks. Investing in smaller companies offers several advantages such as –

Inherent Growth Potential

Small-cap firms usually harbour significant growth prospects. Large cap companies have already experienced substantial growth and may have limited room for further appreciation in share prices. Conversely, smaller companies have the potential for significant growth and price appreciation in the years ahead. Investing in small cap stocks allows individuals to seize opportunities early on with emerging companies. By purchasing and holding shares of smaller companies, investors can benefit from potential future growth and value appreciation. If the company succeeds, it may eventually transition from small cap to large cap status.

Higher return potential

Market inefficiencies may offer high-quality smallcap stocks at more affordable prices. While large cap companies can provide stable returns and potentially offer income through dividends, small caps historically outperform larger companies in terms of average annual returns. Smaller companies tend to be more agile than their larger counterparts, allowing them to adapt quickly to market cycles, introduce new products or services, or undergo internal restructuring as needed. These factors contribute to the potential for small cap stocks to deliver better performance within their specific market segment compared to larger competitors.

Less competition from Institutional Investors

Institutional investors, such as banks, hedge funds, and real estate investment trusts, often overlook small cap stocks due to their size. Additionally, regulatory restrictions restrict these investors from heavily investing in small caps. This creates an opportunity for individual investors to enter the market and potentially witness the growth of small companies over time.

Top 10 Small Cap Stocks Performers of 2023

Precision Camshafts Ltd. (PRECAM): A leading global manufacturer of camshafts, a key component in vehicles. They provide innovative solutions to a diverse range of clients in the automotive industry. The growth trend has been distinctly positive for this company, rising from 81.42% in 2022 to 161.50% in 2023, and further accelerating to 176.32% since April 2023. Volume is quite high which signifies active trading and liquidity. This impressive progression points to the company’s strong performance in the rally.

Mazagon Dock Shipbuilders Limited (MAZDOCK): India’s premier defence shipbuilding company under the Ministry of Defence. Mazagon Dock constructs and repairs warships and submarines for the Indian Navy. The company experienced a high growth of 541.97% in 2022. However, the returns reduced to 117.27% in 2023, but the company managed to boost it back up to 160.52% in April 2023, capitalizing on the small-cap rally. High trading volume shows liquidity and investor confidence.

Fertilisers And Chemicals Travancore Ltd. (FACT): FACT is a leading fertilizer and chemical manufacturing company in India. They primarily produce ammonia, sulphuric acid, ammonium phosphate, and complex fertilizers. After an impressive surge in stock price by 269.55% in 2022, it slowed down significantly in 2023 to 31.50%. However, with the small-cap rally in April 2023, returns have rebounded to 138.33%.

Jindal SAW Ltd. (JINDALSAW): A part of the O.P Jindal Group, Jindal SAW Ltd is a leading global manufacturer and supplier of iron and steel pipe products, and related services predominantly across India, Europe, and the USA. It exhibited high returns for both 2022 (256.80%) and 2023 (233.25%).

Aurionpro Solutions Ltd. (AURIONPRO): A technology company that offers solutions in digital innovation, enterprise security, and banking solutions. It helps enterprises to be more efficient, secure, and improve customer engagement. Stock returns have been consistently strong with returns of 143.42% in 2022 and 109.74% in 2023, further increasing to 133.50% since April 2023, thus benefiting from the small-cap rally. With low market cap and low volume indicating low volatility, this stock may have been under the radar.

Force Motors Ltd. (FORCEMOT): Force Motors is an Indian automotive manufacturer, known for their multi-utility vehicles, light commercial vehicles, tractors, and engines. This stock has displayed consistent growth, providing stock growth of 121.16% in 2022 to 98.35% in 2023. Since April 2023, the stock returns are 132.99%.

Suzlon Energy Ltd. (SUZLON): One of the leading renewable energy solutions providers in the world, specializing in offering total solutions in Wind Power Generation with over two decades of operational track record. Despite a decrease in returns from 78.43% in 2022 to 71.70% in 2023, Suzlon has been able to turn the tide with post-April 2023 returns of 130.38%.

JBM Auto Ltd. (JBMA): JBM Auto is part of the JBM Group, a leading global auto parts manufacturer. They primarily produce sheet metal components, assemblies and sub-assemblies, and automotive systems. The company maintained strong growth from 2022 to 2023 with returns of 228.15% and 187.59% respectively. Since April 2023, it has recorded returns of 129.89%.

Shriram Pistons & Rings Ltd. (SHRIPISTON): A part of the Shriram Group, Shriram Pistons & Rings Ltd is a leading provider of high-quality pistons, engine components, and rings. They serve both the automotive and non-automotive sectors, boasting superior products and solutions that cater to a wide array of requirements. The company’s stock has been steadily increasing year by year, returns increased from 37.02% in 2022 to 86.37% in 2023, and further soaring to 121.80% since April 2023.

Genus Power Infrastructures Ltd. (GENUSPOWER): An integral part of the Kailash Group, Genus Power Infrastructures Limited is an advanced metering solutions provider. They design and manufacture smart meters and also offer cost-effective and energy-efficient solutions. Stock showed strong growth in 2022 (170.97%) and continued to perform well in 2023 (119.91%).

Conclusion

Investing in small-cap stocks can provide excellent long-term investment opportunities. For investors looking for exposure to small-cap stocks, index funds are often a viable and straightforward option. These funds offer diversification and typically come with relatively low costs. Alternatively, investors can consider actively managed small-cap mutual or exchange-traded funds. A common strategy employed by investors is to buy a basket of small, young firms in a rapidly growing industry, then reinvest in the firms that emerge as winners as the industry matures.

Small-cap investments do carry a certain level of risk, and many end up losing money or going out of business. However, those that succeed can offer significant returns. Just as a cricketer doesn’t need to hit a boundary on every ball to have a high batting average, investing in small-cap stocks doesn’t require every pick to be a winner in order to generate a winning long-term return. Even if some investments fail, those that succeed can provide substantial returns and boost the overall performance.

Explore our small-caps portfolio to learn more about small caps and how to invest in top small-cap stocks.

Liked this story and want to continue receiving interesting content? Watchlist Wright Research smallcases to receive exclusive and curated stories.

Disclosure:

This is not an investment advise.

Disclosures: https://www.smallcase.com/manager/wright-research#disclosures

SEBI Registration Details: Corporate Registered Investment Advisor | Company Name: Wryght Research & Capital Pvt Ltd Reg No: INA100015717 | CIN: U67100UP2019PTC123244.

For more information and disclosures, visit our disclosures page here.