High 200%? What to Know Before Investing in Small Stocks

The “dwarf” actions, better known as “small caps“, suffer more from the ups and downs of the Stock Exchange, but they can be a great investment opportunity for those who don’t care about these fluctuations. So much so that they are among the most valued stocks on the São Paulo Stock Exchange. they have already yielded more than 200% this year, but as everything has its B side, it is good to warn you that the investment risk is much greater.

By definition, “small caps” are company assets that have annual revenues between R$300 million and R$2 billion. Despite the name, this does not mean that they are small companies, points out Gustavo Bertotti, economist at Messem Investimentos.

In the group of “small actions” are companies such as M. Dias Branco (MDIA3), owner of the Adria pasta brand and Piraquê cookies. There is also Zamp (BKBR3), the current name of BK Brasil, owner of the Burger King chain of cafeterias, and the footwear manufacturer Vulcabras (VULC3).

Which companies gained the most? There are papers that yielded 211% (from the beginning of the year to August 8), as is the case of Dommo Energia (DMMO3), former OGX Petróleo e Gás, owned by businessman Eike Batista. The oil company went into bankruptcy in 2013 and four years later, at the end of the process, changed its name to Dommo.

There is also the payment machine operator Cielo (CIEL3), with a 123.67% increase. See the ten most valued between January 3 and August 8, according to a survey by Economatica:

  1. Dommo (DMMO3) 211.54%
  2. Cielo (CIEL3) 123.67%
  3. Kepler Weber (KEPL3) 75.53%
  4. Log-In (LOGN3) 49.03%
  5. Enauta Participações (ENAT3) 46.97%
  6. Vulcabras (VULC3) 45.19%
  7. Mills (MILS3) 39.09%
  8. M.Dias Branco (MDIA3) 38.20%
  9. BK Brazil/Zamp (BKBR3) 36.79%
  10. Alliar (AALR3) 36.61%

Why do they value it so much? Small stocks are usually in growth companies. A “small cap” company doubles in size more easily and well before Itaú (ITUB4), for example, manages to be twice as large, explains André Zonaro, an analyst at Nord Research. It’s like comparing the skill of a speedboat to that of an ocean liner.

But all the “small caps went up? These returns are eye-popping. But it is necessary to go beyond them, according to the analyst. They are a great investment for someone who wants high returns, but the risk is too great, he says.

Compare with Ibovespa, for example. Year-to-date, the index grew by 6.05% in the year. But the SMLL index of the B3’s “small caps” is negative in the same period at 4.05%. In other words, these actions went against others with similar characteristics.

Why are these stocks riskier to invest in? Because they are smaller, they are very sensitive to the news, says Bertotti. If inflation rises, the dollar falls, interest rates rise or if there is speculation about the company’s purchase, the “small cap” always drops a lot or goes up a lot.

That’s what happens with Dommo. “There are rumors that it can be bought,” says the economist at Messem. The oil company no longer belongs to Eike Batista. Prisma Capital, an alternative investment manager, controls Dommo with more than half of the shares. Since 2017, when it changed its name, Dommo has accumulated an 87% loss on the stock exchange.

As the main objective of these companies is to grow in their markets, this is what drives their actions. “The problem is that this growth plan may not work. Or even take longer to happen than expected”, says the Nord analyst.

Recovering the loss: Dommo, Cielo, BK and M. Dias Branco are showing high appreciation recently. But when analyzing the stock’s history, the result is still negative. In other words: this group of small caps only recovered part of the value they lost.

This is the case of Cielo. Over the past five years, the company has racked up losses of 78% – although the stock is skyrocketing now. Is it worth investing in these companies? It can be a good investment, but the tide can turn at any time.

And are there more stable options? The Kepler Weber Agricultural Storage Solutions company, Log-In, of logistics, Mills, of engineering, and the food manufacturer M.Dias Branco are in an intermediate group that has been showing growth for longer and more conscious, according to Zonaro . “They are great companies”, says Bertotti.

But you have to open your eyes to others. Alliar, for example, is a diagnostic medicine group that was bought in April by businessman Nelson Tanure for R$ 1.25 billion. He bought the participation of the Patria fund and the founding doctors in the company. Since then, investors have been buying more of the stock, which has led to a rise in value, says Zonaro.

Before investing, it is always good to analyze mainly the level of indebtedness of companies. It is he who often determines whether the company’s “small cap” growth plan will work out or not.

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About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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