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Recently, the topic of small-cap stocks has been a constant point of discussion.

This is already the third time this year that small-cap and micro-cap stocks have been brought to the forefront.

The first time was at the end of January, which was when the market was plummeting in search of a bottom.

The second time was in mid-April, which was right after the release of the "Nine Measures" policy.

The third time was in early June, which was when the indices began to adjust.

Not once was it due to an increase; every time, it was because of a significant drop, and a desperate one at that, without any regard for cost.

This has led to the widespread mention of the term "complete annihilation."

Indeed, small-cap stocks, especially those on the ChiNext and the Science and Technology Innovation Board, can drop by 20% in a single fall, which is very painful.

In the short term, losing 30-50% is not a rare occurrence.

A few stocks that have fallen below 1 yuan, if you look back at the beginning of the year, were at their highest at 2-3 yuan, which means they have already dropped by 70-80%.The significant decline in small-cap stocks can actually be attributed to several reasons.

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Firstly, there is an element of overvaluation in the stock prices.

The overvaluation referred to here pertains to the period prior to the decline.

Especially in the case of micro-cap stocks, their stock prices are indeed overvalued.

A large portion of micro-cap stocks are incurring losses, and even those with profits only have a net profit of tens of millions per year.

In the current environment, a net profit of tens of millions is precarious and could easily turn from profit to loss at any time.

However, the valuations of these stocks are all between 2 to 3 billion, which is definitely overvalued.

A company without profitability, with a valuation of around 1 billion, may already have some overvalued elements.

Overall, small-cap and micro-cap stocks lack the ability to generate profits but enjoy decent valuations, which poses a significant risk.

If one looks at the micro-cap stock index, it was extremely high before the decline, indicating a very high risk.The decline this year is actually a correction for these overvalued estimates.

However, the correction has never been a one-step process, but requires round after round until it naturally reaches the bottom.

Secondly, the performance is very poor.

The first quarter report has come out, and the performance is really very bad.

Those that should be at a loss are still at a loss, and there are also many with a decline in net profit.

This is affected by the macro economy, and it is difficult to solve in the short term.

The performance winter of small and medium-sized enterprises will not pass quickly, but the turning point may come soon.

That is, the worst situation may be in 2024, even if it is not very good in 2025, at least it will be better than 2024.

The backlog of performance risks will be concentrated in 2024.

Then the expected impact on small-cap stocks in 2024 will be very large.The first-quarter report may just be the beginning, and the release of the mid-year performance is coming soon, with expectations potentially being even worse, leading to a stronger sentiment of risk aversion among funds.

Thirdly, there are certain hidden dangers.

The hidden dangers mentioned here actually refer to the possibility of a "bombshell" or unexpected negative event.

A bombshell and poor performance are not the same thing.

Poor performance can be known and public, but a bombshell refers to the unknown.

Suddenly being exposed for financial fraud, suddenly being designated as a Special Treatment (ST) stock, this suddenness is the hidden danger.

The various bearish factors that have emerged suddenly for small-cap stocks this year are mostly unknown, with the market unprepared.

So, the choice of funds is very clear: to avoid these small-cap stocks to prevent accidental damage.

Moreover, regardless of good or bad performance, there may be unknown hidden dangers and risks, and funds naturally choose not to participate.

After all, not participating means zero risk, at most it just means not making a profit.If you can't afford to provoke, you can afford to avoid.

What retail investors care about most is whether small-cap stocks can make a comeback, and whether there is a case of being wrongly killed.

Let's talk about the issue of being wrongly killed first.

There is definitely a case of being wrongly killed.

However, the proportion is actually very low.

At least 80% of small-cap stocks have not been wrongly killed, and their performance expectations and various aspects are indeed not very good.

Economic development has reached this stage, and the situation of small-cap stocks is different from before.

It used to be the golden age of the development of small and medium-sized enterprises, but now it is an era of involution, and it is very difficult for enterprises to stand out, facing great competitive pressure.

Under such a big background, what small-cap stocks need to do is valuation repair.This valuation repair refers to the overall reduction in the valuation of small-cap stocks, entering a new reasonable range.

The original PE ratio of 30-50 times given to small-cap stocks was due to the emergence of a series of good companies.

The probability of small-cap stocks growing up is high, and their growth potential is very good.

Now, small-cap stocks can only be given a PE ratio of 20-30 times, because those that can grow up have already grown up, and the proportion of those that can develop in a low-key way is very low.

Looking at the overall PE level, it is inevitable that there will be a halving.

There is also a problem here, which is the IPO and delisting system.

In fact, high-quality small-cap stocks mostly come from the IPO.

The slower the speed of the IPO, the fewer opportunities there are for new big bull stocks, and the higher the probability that old small-cap stocks will enter a recession period.

Therefore, the problem with small-cap stocks is not that there are too many IPOs, but that there are too many, and the delisting efficiency is not high, and there are too many garbage stocks in the market.

This leads to a higher probability for investors to buy junk stocks.In 2024, the pace of initial public offerings (IPOs) is lower than the speed of delisting, which is what constitutes a healthy market.

However, when small-cap stocks accelerate their clearance, there will inevitably be some pain.

This pain is the risk that some relatively good companies may be mistakenly punished by capital.

Or rather than being called a mistake, it is the valuation trough brought about by the drying up of liquidity.

Because capital seeks safety and leaves small-cap stocks, leading to a withdrawal of funds regardless of quality, causing stock prices to fall.

At least at this stage, this kind of mistake will not be improved in the short term.

The reason is simple, because capital is afraid that there are still hidden bombs that have not been detonated.

Unlike large-cap stocks that are surveyed by the market every day, many small-cap stocks are not known for their actual operating conditions.

That is to say, the batch of capital that buys small-cap stocks may not be very familiar with the situation of this listed company.

Naturally, at this stage, they will not rashly layout these small-cap stocks to avoid stepping on a mine.So, even for small-cap stocks that have been mistakenly killed, it is not a good time to lay out a plan at present.

At least, we should wait until the market's clearing actions are completed, and those small-cap stocks that need to be cleared are almost cleared, and the sentiment is relatively mild.

This is like a bullet that doesn't distinguish between friends and foes, let it fly for a while longer, don't be the first to stick out, it's the same principle.

Rebirth from the ashes is inevitable, but it is also necessary to see that some will dissipate in the flames.

In the end, those that can be reborn are the surviving small-cap stocks, not those that need to be ST, and the small-cap stocks that need to be delisted.

This is similar to small and medium-sized enterprises, they have their own cycles, and those who can eventually grow and become strong are always a minority.

This time it is a large-scale clearing, so in the short term, it is definitely necessary to avoid it.

After the clearing is over, what is left is basically high-quality, and you can participate boldly.

At this stage, let the capital make the choice, and let the retail investors quietly watch the show.