Some smallcap stocks are overvalued, prices may fall

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Prashant Khemka, Managing Director and Founder of WhiteOak Capital Management, has warned that some segments of smallcap companies are overstretched in valuations and their prices are likely to fall at some point.

Khemka said that the prices of some cyclical and domestic-oriented stocks in the manufacturing, power, and defense sectors are overstretched. He added that the small and midcap stocks have risen unidirectionally over the past 5 months, with the Nifty Smallcap 100 index giving a return of 44.70 percent and the Nifty Midcap 100 index rising by 37.39 percent in the same period.

Khemka attributed the recent rally in smallcap and midcap stocks to a number of factors, including low interest rates, strong liquidity, and a positive sentiment towards the Indian economy. However, he cautioned that these factors are not sustainable in the long term and that the valuations of some smallcap stocks are now stretched.

“At some point in the future, I don’t know whether it is next month, next week, next year, down the line, I believe collectively, these segments of the market would be available at lower prices than where they were at today,” Khemka said.

He advised investors to be careful when investing in smallcap and midcap stocks and to focus on companies with strong fundamentals and good management. He also said that investors should be prepared for a sustained downturn in some of these stocks.

Khemka’s warning comes as the Indian stock market is facing some headwinds. The Nifty 50 index has fallen by more than 2% in the past week, and the broader market has also seen some weakness. This weakness is likely to continue in the near term, as investors become more cautious about valuations.

However, Khemka believes that the long-term outlook for the Indian stock market remains positive. He said that the economy is on a sound footing and that corporate earnings are likely to grow in the coming years. As a result, he expects the stock market to recover from its recent weakness and to continue to deliver strong returns over the long term.


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