How to Identify Multibagger Stocks?
Here is all you need to know while figuring out Multibagger Stocks-
Strong and Capable Management
A business cannot succeed without a management team that is capable and strong. Behind the sustained success of every business is strong management. Strength can be a subjective characteristic.
You can look at multiple aspects like governance practices, board independence, diversion of funds to other businesses or for personal interest, pledging of shares, discipline with obligations, and financial matters. This is to determine the strength of the management team.
Competitive Advantage
This is one of the best ways to identify multibagger stocks in India. A company can stay in the competition by offering better services and products as it grows.
For example, Madras Rubber Factory (best known as MRF) was started by a small-town balloon toy manufacturer.
And the company has been improvising its products and services as per the demand of the customers. This zeal to keep innovating and tweaking or diversifying their offering as per demand has given them a competitive edge over other companies. It is what kept them strong over the years.
Strong Promoter Holding
When you invest in a stock, you do not just invest in the business but also the people who started it. If the person who started a business doesn’t remain committed to its growth and has defaulted on several occasions, there is little value in even evaluating such a stock.
Needless to say, substantial promoter shareholding is an essential factor to take heed of while assessing a name.
Healthy Earnings Growth
A shareholder earns when the company makes profits. When you look at the earnings of a multibagger stock, you will typically find a high growth in the earnings of the company due to its revenue growth model, profitability model, and also capital allocation model.
You may use the formula to estimate the Earnings per Share (EPS)
EPS = Net Profit/Number of Outstanding Shares
The EPS shows how much a company is earning against each share. The EPS of a multi-bagger should be climbing north.
Study the PE Ratios
A company’s price-to-earnings (PE) ratio is the ratio of its share price and earnings per share. A Multi-Bagger stock has a faster-growing PE Ratio as compared to the stock price.
High Margin Businesses
Another simple answer to the question – of how to identify Multi-Bagger stocks is to look for businesses that have high margins. Usually, multi-baggers command high margins either due to a lack of competition or because they command a leading position in the industry.
Moreover, these stocks tend to have a sustained margin over time that doesn’t fluctuate every quarter or year.
Prudent Allocation of Capital
Multi-bagger companies usually use their internal funds to expand or launch new products. These companies also tend to have a lower debt level against equity. These companies tend to generate free cash flow.
It is computed as cash flow from operations minus the purchase of fixed assets. This cash flow is to be used to fund future expansions or pay dividends.
Growth Potential
A company may not be able to make money if it doesn’t have a comprehensive range of products or services, as the markets are very dynamic.
One of the characteristics of a multi-bagger stock is that the management is very vocal about its vision. And is able to explain the steps being taken to achieve the same.
Remain Patient
The trick about multi-baggers is that you always know that you have a multi-bagger only in hindsight.
While you are invested in such a stock, you can be tempted to sell. However, the key lies in having patience and making the right decisions at the right time.
Conclusion
Discovering decent stocks, let alone Multi-Baggers is a huge challenge. It is incredibly difficult to dedicate more time to research and evaluation as a business major.
Signing up with a stock advisory firm and receiving informed stock advice from experts is your best bet. Most relevantly, it will increase your odds of undergoing multi-bagger expansion.
Happy Investing!
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
