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These stocks could be the next multibaggers according to Jefferies

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By on Low Rate Caps

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HIGHLIGHTS

  • India is an excellent source of alpha generation.
  • The likelihood of the small cap index outperforming the large caps remains low in the short term.
  • Sectors with higher review and assessment profiles include energy, materials, banking and utilities.
New Delhi: Jefferies, through its quantitative screening framework, helps narrow down potential multi-baggers for further bottom-up research. Their analysis shows that since 2000, around 20% of Indian companies have generated returns over 200% over a five-year period, compared to a global average of just 9.2%, making India an excellent source of revenue generation. ‘alpha.

Some 92% of these multi-baggers started out as small caps and nearly 30% had no short-side coverage. Sector-wise, Healthcare and IT have the highest multi-bagger success rate after GFC, while Real Estate, Utilities and Telecom/Media have lagged behind (introduced in 2020). According to their selection mechanism, Jefferies highlights the items below as potentially outperformers:

Jefferies
Jefferies

Jefferies observes that, on average, small cap cycles lasted about a year, with the smallest cycles lasting 3-4 months, while the longest lasted nearly 2.5 years. Cycles usually started following a market correction, so perhaps the next cycle will coincide with the overall market recovery.

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However, in the short term, if history repeats itself, the likelihood of the small cap index outperforming the large caps remains low despite some supporting factors.

Jefferies notes that currently we are in the midst of a downgrade, which has taken the forward PE valuation of the MSCI India small-cap index from over +2sd to +1sd. Given the unfavorable market environment and a potential slowdown in the economy due to rising rates and inflation, small caps are likely to underperform further.
Although they have been downgraded below the +2sd level, they remain above pre-COVID history. Therefore, given the acceleration of Indian small cap downgrades, they advise caution on the valuation front. Sectors with higher review and assessment profiles include energy, materials, banking and utilities. In contrast, consumer discretionary stocks are expensive and face significant downgrades.
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