We’re used to hearing terms like Fixed Deposits and Mutual Funds when it comes to investments but have you heard of the term ‘Multibagger Stocks’? Even though there is no one definition for it, we can still succinctly refer to it as an investment option that could generate returns for an investor to the tune of 1000% or even more within a 5-10 year period.
Multibagger stocks have immense growth potential but they are rather difficult to identify. However, by leveraging some key traits, it might be possible to identify Multibagger stocks by conducting research based on the following parameters:
Additional Reading: Your First Steps To Investing In The Stock Market
Determine Promoter Quality
One of the best ways to identify a Multibagger Stock would be to find out who the promoters are. This basically refers to those people who are responsible for the daily management of that particular company. However, you should keep a check on the latest happenings every quarter to ascertain that the promoters have not moved on.
Find the Right Company
Identify an enterprise by doing research on the industries that are witnessing a surge in their growth. The industry should either belong to a niche category or be a new entrant. It should be something new and disruptive. Suitable enterprises should have great market potential in terms of expansion and growth. In such a scenario, you should purchase shares of the company before it comes into the spotlight, owing to its high potential.
Purchase Shares at the Correct Time
After you have researched and found an industry or company that you perceive to be a ‘multibagger’, do not impulsively decide to purchase shares. It is only when you buy the shares of the said company at the right time and the right price will it become a ‘multibagger stock’. A way to ensure high returns would be to buy the shares when they have a low extrinsic value. One of the best ways to evaluate the shares would be to study the P/E Ratio or the Price Earnings Ratio. However, this is a good bet for businesses that have a definite terminal value and predictable cash flow.
Additional Reading: Pros and Cons of Investing in the Indian Stock Market
Greater sales as Opposed to Fixed Assets
Another way to identify a multibagger stock would be to find those companies that have higher revenue in comparison to fixed assets. Such companies are likely to gain higher market valuation as later they will be able to earn more through revenue without having to invest in fixed assets further. Another way in which this can be achieved would be to analyse the turnover ratio of fixed assets over a certain period of time.
Determine Scalability and Earning Sources of the Company
Rather than analysing just the earning figures of the company, it is better to research and find the sources of those very earnings. If at the end you discover that the business holds potential in the segment that it operates in, then it would be wise to invest in its shares. In such a scenario, do not bother too much about whether it falls under a micro-cap, small-cap, mid-cap or large-cap segment, just focus on the scalability factor.
Gross Margin as an Indicator
Gross margin is indeed a good way of determining whether or not a company has been in command of its services, goods, specialisation or market reputation. Multibaggers are those companies that emerge with higher gross margins. The products by such companies are valued by the customers, and hence the potential rises when they seek to enhance their outreach to other markets.
Additional Reading: Real Estate Investing 101
It is important to research and interpret the various quarterly results that companies upload on their websites. It is there that one can gain vital information about the company in connection with its structural amendments, capital expenditure and other crucial management decisions. When the capital expenditure or capex of an organisation surges, this means that it’s either replacing the current machinery/plant or it is increasing its capacity. Such companies are likely to be multibaggers and worth investing in.
Additional Reading: What Really Affects The Stock Market
Researching the debt level of a company is a great indicator of whether or not it is a potential multibagger. A company that possess reasonable debt or possibly no debt at all would invariably make it a multibagger stock. This can be determined by a strong balance sheet where the debt is less than 30% of equity. A company that has a high level of debt would end up paying a high percentage of its profits at the end of each quarter toward debt repayment. Hence, if you observe that the EPS or Earning Per Share of a company is experiencing a 30% growth each year, then that is definitely a share worth investing in.
However, one must understand that while potential multibaggers can enhance the returns in an investment portfolio, they are not for everyone. It is important to keep into account aspects such as risk tolerance, cash flow requirements and volatility before making investments towards such potential gains.
Additional Reading: Make big money from small stock investments!
We know investing in the stock market is not easy. It requires skills, information and vigilance. But your fear shouldn’t stop you from getting the gains that come with stock market investing. You can begin by investing in a Mutual Fund. We can help you with that.
For layman you can also opt for simple method: Firstly, list out the name of the sectors which fulfills below two conditions as Multibagger stocks emerge from sector that has huge potential.
1. Sectors that accomplish the countries vision, favorable to taxation policies, in trend of budget policies.
2. Sector should be favorable to countries current demand trend.
After selecting sectors now do a confined scan of companies few critical stuffs:
1. From the selected sector find out the companies that are in a startup or high growth phase. Multibagger stocks come from small cap or mid cap companies as they possess highest potential to give exponential growth.
2. Now most important thing is to check out the management of those companies, majority companies will be kicked out in this step.
We appreciate your inputs. Keep reading our blog for more insights into the world of finance.