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Multibagger Stocks

(Last updated on 25th Oct at 12:06 pm)

Guidelines for Multibagger Stocks

What is a Multibagger Stock?

A Multibagger stock is an equity stock which gives a return of more than 100% i.e. investment in a stock more than doubling. A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. Thus, Multibagger are stocks whose prices have risen multiple times their initial investment values. 

The term was coined by Peter Lynch in his 1988 book, One Up on Wall Street and comes from baseball where "bags" or "bases" that a runner reaches are the measure of the success of a play.

Please note that the examples given here are only for understanding and NOT recommendations to buy these shares now, since they might have already grown multi fold.

Key Attributes of A Multibagger Stock:

To begin with, one can start working with following set of basic information, which are more often than not are precursor to a Multibagger Stocks

  1. Market Leadership: Generally, Multibagger stocks are of companies that are market leader in their business. In this case, it may not necessarily be a large cap company. Infact, one the best ingredient for a Multibagger Company is Market Leadership with small market cap. Example: PPAP Automotive – Now it is gaining traction among analysts, but couple of years ago, it was available at market cap of Rs. 100 crores despite being leader in Sealing system solutions for car. Now, market is over Rs. 580 crores. Similar case in point would be Sterlite Tech, which kept trading at PE of 26-30x and yet rose from Rs. 90 to Rs. 414 in less than 3 years. Those who thought valuations are expensive, missed the bus. Here we must highlight that with superior earnings growth and market leadership positions, valuations can become very expensive and yet stock can keep rallying!
  2. Robust Business Model: The first sign of robust business model is Debt Free Balance-sheet with High RoE. The moment you get a market leader + small market cap + Debt Free + High RoE, you are very close to finding your Multibagger. E.g. Jamna Auto. It is very important to be cautious on High Debt companies, as interest burden in a tough environment can lead to losses and stock can lose multiple times rather than rising multifold.
  3. Promoter / Management: Efficient promoter / management (MD & CEOs) generally have great influence on valuations, apart from EPS, as markets tend to give higher valuations to companies with credible management. One way to feel secure on this front is listening to conference calls and tracking changes in promoter shareholding.
  4. Earnings Growth: Ultimately, it is earnings and earnings only that makes or breaks a stock. What it does today, tomorrow or next day is mere distraction. You must think that how much a particular company needs to earn in order for market cap to rise more than 10-15x. If you believe the company can do that, that’s your Multibagger.
  5. Trend: Generally, majority of Multibagger stocks born in a sector with Trend Upside. Like commodities in 2017 where smaller players like Pondy, Nile, Maithan etc gave Multibagger returns. There is always a trend available to play in the market. Most important thing is to avoid buying Trend Stocks, once the trend is over, as they will keep going down and when everyone is tempted to buy, the story is pretty much over!
  6. Valuations: Deep valuations discount as compared to Peers and Industry, coupled with earnings growth, can create Multibagger Stocks. eg. Universal Cables 
  7. Holding Period: In stock market, Time is more important than Timing The Market. A stock can deliver 200-300% returns in 3 months as well and it may take 3 yrs as well. Happening this in 3 months happens to few in millions. Once convinced about the enormous potential of a company, one must invest with Long Term view of at-least 2 to 3 years. However, he might get lucky and get multifold returns few months only, but one cannot keep this in mind while making in investment, expecting Multibagger gains.

Things to know about multi-bagger stocks:

  • Before you start researching multi-bagger stocks, here are few things that you should know about them.
  • Multi-baggers are those companies who are financially strong and has a good business model that can be scaled within a short period of time.
  • What really makes a stock multi-bagger is “Time + Continuous growth”. If a company is delivering continuous growth for a longer sustainable period of time, then it would turn out to be a multi-bagger in the future.
  • These stocks take a long interval of time (5-15 years) to become a multi-bagger. That’s why you need to have a high degree of patience while investing in these stocks. If you are gonna book a profit of 60-70% after 10-12 months, then you might never be able to get a multi-bagger stock. Maybe, you’ll find it but you’ll not be able to get maximum profit out of it.
  • In order to hold multi-bagger stocks, you need to understand the business. Only after doing so, you can be confident and patient enough to hold the stock for several years.
  • Historically speaking, small and mid-cap companies have given the most number of multi-bagger stocks. However, this doesn’t mean that large-cap companies cannot become multi-bagger stocks.
  • Don’t feel bad if you missed a few multi-baggers in the past. Even if you are able to find and hold just One multi-bagger stock in your portfolio, your overall returns will be amazing.

Known traits to find Multi-bagger stocks

  • Growth at a reasonable price (GARP) stocks: Instead of investing in entirely ‘growth’ or entirely ‘value’ stock, select growth at a reasonable price (GARP) stocks, which has the mixed characteristics of both growth and value stocks. This can help you find a growing company without overpaying for it.
  • Turn-around stocks: These are those companies who once got beaten badly by the market, however, now are getting back on the track.
  • Mis-priced opportunities – You can find multi-baggers returns by investing in those companies who have a good potential, however, either ignored by the market or is out of flavor for the investors.
  • Structural or management change in the organization: If there’s a major structural or management change in the organization that can drive the growth of the company, then it may be a potential multi-bagger.
  • Sustainable competitive advantage: If the company is one of the kind or have created an entry barrier for the competitors, then definitely it can give multiple times return in the future.

Buyer Beware (Caution on Traps In The Markets)

  • Time to enter:

The biggest problem with retail investors is that they enter when it is time to exit. To enter at a right time, it is important to identify such stocks in advance else it becomes a sort of bull trap. As an investor, if you find that the stock has run-up considerably and the steam is fizzled out (Trend or Story is over) then there is no point taking the immediate exposure.

  •  Marketing Gimmick & Exit Rout To Big Fishes

In today’s market, certain part of community is prefixing the word Multibagger to sell a particular/basket of stocks. Adding a word Multibagger makes ordinary below avg company look very attractive and greedy and impulsive people rush buy, without taking even 1 day for them, to analyse basic things. Remember, it is truly Multibagger stock, you will make huge money even if you buy after 50% rise! Be patient and check facts.

Myths About Multibagger Stocks

  • It must be right since it’s in the Media / Social Media

People have a very big misconception that Media / Social Media is there to help you in making money. Rather they are classic example of Pickaxe & Shovel Theme.  During Great Goldrush of California, all the people ran to dig Gold. However, few started selling Pickaxe and Shovel to let them dig. Who do you think made most money?  The ones who were digging for Gold or the ones who were selling Pickaxe & Shovel?

  • I won’t sell until I recover my capital

If you really agree with this view; it means that your ego is taking the lead. It’s better to stay calm and take a decision after proper analysis. An analysis can go wrong as much moving parts and future projections are involved. In such cases, the best option is to evaluate the information at hand, rather than simply holding on in hopes of recovery.

  • This stock is down 90%, how much it can fall more

This is one of the biggest of all mistakes which most people do. Say XYZ company which was priced at 200 a few months back, is currently quoting at Rs 10. Suppose you bought 100 shares at Rs 10 and since the stock has already corrected 90% so you may think that the only risk is Rs 10 per share. But say in a month’s time, it came down to Rs 2. In absolute terms, it’s just a loss of Rs 8 but in a relative sense, you have already lost 80 % of your capital. So, you need to analyze accordingly. It’s better to analyze company’s fundamental than the percentage fall of the stock.

  • You have to be a genius to make money in the stock market

Most people say that you need to make a lot of analysis and calculations in order to analyze a stock, but it has been found that big and highly qualified fund managers have failed to even beat the market while on the other hand, many common investors have outperformed the market simply by applying common sense and general observations.

  • Let’s borrow money to buy more of it

This is another term which is popularly used by the stock brokers and fund houses to dump their stocks and to fool people. So be very careful, when you come across this term and rather carry a detailed analysis in case of these stocks.

Bottomline

Never underestimate yourself since self belief & an independent mind set are needed to be a successful investor. Always keep in mind, that you yourself are capable of managing your money. Happy investing!!

Please note that the examples given here are only for understanding and NOT recommendations to buy these shares now, since they might have already grown multi fold.


Rules to Follow when acting on our calls

  1. This is a Long Term Investment Section. Do not put more than 10% of your equity funds in all calls put together. Never put more than 2% of your equity funds in one stock.
  2. These stocks need to have a view of 3 to 5 years, which is the minimum holding period criteria for Multibagger stock.
  3. Section is giving yearly target, which if held for 3 to 5 years will give Multibagger returns.
  4. Take them as long term, high growth, thematic calls. Avoid SL concept, which is defeating investment objective of this column. Those who want to exit in case of loss should put a SL of 25% of your cost.
  5. Multibagger Stocks are never frontline stocks, but stocks which are presently ruling low, but having future growth potential, either due to business cycle or management capability.
  6. These are pure Investment calls and strictly advised to AVOID them trading in Futures & Options segment. These calls can be purchased in cash by all members having Growth, Balanced and Conservative profile.
  7. Members take note of paying delivery brokerage of not more than 0.20% + STT to enable members to make profits on these calls.
  8. We try to have between 4 to 6 active calls in this section and try to provide about 1 call in a month in this section. Number may vary as per market conditions.
  9. Disclosure: Our interest in the call is given in the Disclosure column. 'Have Interest' implies we have holding in the stock, while 'No Interest' means we do not have any holding in the stock.
  10. Rationale for advise: Calls in this section has been given based on fundamentals, recent news flows and valuations, as observed in the market and in the stock.

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