The risk reward in Small-Cap stocks is very lucrative and can be bought aggressively: Gautam Shah

The risk reward in Small-Cap stocks is very lucrative and can be bought aggressively from a 6 to 18 months perspective. Given the data and technical studies, there is no way one can lose money buying quality small-cap stocks from an investment perspective.

Small-Cap stocks are famous/ notorious for swinging from one extreme to the other. While 2020 was a fantastic year with incalculable multibagger gains, 2022 has been a year of relative underperformance. They have witnessed severe price correction and have retraced 38.2% of the entire bull market. They have also experienced time correction.

Experts are advising that the correction in small-cap stocks may be bottoming out and it is time for us to dip our toes into them. HDFC Securities issued a strategy report stating that these stocks are on sale and should be bought.

Gautam Shah, the noted expert on Technical analysis with Goldilocks expressed the same view.

"On an average basis, the fall has been more than 40%. So it has been very large and as things stand, we are very comfortable with the smallcaps. The risk reward has got lucrative once again and we are recommending our clients to look at smallcaps aggressively from a six, 12, 18 months perspective because if you go by the breadth data and the technical studies, I do not think there is any way one can lose money buying into smallcaps from an investment perspective," he advised.

Which sector and which stocks

Gautam Shah advised that we should focus on the "unlock theme", "Defense" and "Fertilizer" because these sectors and themes are in demand and will continue to be so in the foreseeable future.

"The unlock theme has been my favourite all along and I believe that it is here to stay from a slightly longer-term perspective, despite the fact that we are once again talking about concerns around Covid," he said.

As regards the specific stocks, he advised that we look at stocks like Indian Hotels to play the hotel theme; EaseMyTrip for the travel theme and Delta Corp for the gaming theme.

As regards the "Defense" theme, which is very hot at present, we can consider the top stocks like Bharat Dynamics, Hindustan Aeronautics and Bharat Electronics.

In the fertilizers and chemicals space, we can put our money on Chambal and Coromandel International, both of which are trust-worthy.

Shah also opined that the Midcap IT sector has already seen a very large correction in the last couple of months and could be bottoming out. Many of these stocks could see a strong revival from the current levels.

"Just stay with the leaders in each of these themes that I have mentioned. Pick the top three, five, seven stocks and you should be doing well," he advised.