Modern investors today have access to a wide range of investment products. Also, as the internet takes over, even the process of investing has become simple and straightforward. Investors can choose to invest in equity, bond, or even real estate with just a click!
Also, as online brokerage gains ‘never seen before’ popularity, equity investing has been on a steep rise. Equity investments are arguably the most return-generating and profitable assets in a portfolio. Not only can they generate good returns, but they can also beat inflation to a large extent. Additionally, there is no cap on the return value. A stock can zoom from Rs. 1 to Rs. 10,000! In other words, investors can lock in multi-fold returns from their equity investments.
Now, the returns you receive from a stock can be classified. This will be based on how much the value of your investment appreciates. You must have guessed by now that we are signalling toward multibagger returns and stocks.
If you are a newbie in the markets, you may have come across the term ‘multibagger’ many times! But what does a multibagger mean? Why are certain stocks classified as multibagger stocks? Should you invest in them? Are they safe? How to pick multibaggers?
Here is a detailed guide on all nuances of multibagger stocks! Read on to find answers to all questions you have on such stocks.
What is a multibagger stock?
Peter Lynch first coined the term ‘multi-bagger’ in his book – ‘One Up On Wallstreet’. Lynch borrowed this term from the game of baseball, relating the concept of the game to markets.
Stocks that delivered several folds on their initial investment can be described as multi-bagger stocks. In other words, multibagger stocks are those that can return several times higher than their cost of acquisition, i.e. 100% above their initial investment value. If a stock returns 2x, it is termed as a two-bagger; if 3x, then three-bagger, and if 10x, then 10-bagger, and so on.
Traditionally, high potential, fundamentally strong, and quality stocks from promising industries can make for a good bet and can become one of the best multibagger stocks. These stocks may tick right on all qualitative and quantitative aspects and may still remain undervalued, making them ideal discoveries and investment opportunities.
So, are you wondering how to spot a multi-bagger stock? If yes, read further!
How to find multibagger stocks?
All investors want exponential returns from their investments. And this is why they are always on the lookout for find multibagger stocks. But, finding multi-bagger stocks is not an easy task. It could, in fact, be equated to finding a needle in a haystack! Remember there is no standard framework to discover multibagger stocks. Even most seasoned investors and fund managers miss out on such stocks.
You could take your chances with multi-bagger stocks by following the news, valuations trends, and more. But if you are on the hunt for a quality multi-bagger stock, follow the below-mentioned pointer to place your best bet!
1. Conduct fundamental analysis
Fundamental analysis, in simple words, is the process of analysing a stock holistically, including large perspectives that guide stock markets, such as sector and industry performance; macro factors such as the economy, national and international market movement, interest rates, inflation, recession, and more. Fundamental analysis also includes studying data like revenues, profits, business models, book value, etc., and is arguably the most crucial pointer to finding multi-bagger stocks. This may seem very complicated, but you can start learning the basics of fundamental analysis. Know more about this in our A-Z guide on analyzing stock fundamentals on the Teji Mandi Blog.
If a stock is fundamentally strong and justifies its numbers in terms of revenue and performance, it can withstand market fluctuations and provide good returns over time. You could also bet on sectors to generate multibagger returns. For instance, did you know that experts believe the insurance sector to be the next big thing, expecting several insurance stocks to turn into multibaggers? The trade pandits have made this prediction by analysing the insurance penetration in India, especially in rural sectors. It was not surprising to find that there was great scope for the sector to grow with increased awareness regarding insurance in the country.
Also, as India aims to grow exponentially in the following decades, the IT, tech, steel, and cement industries are expected to churn out several stocks that have the potential to become long term multibaggers.
Do you realise how macro factors can directly affect a stock’s potential and performance? When you pick a stock, you not only invest in the company but also bet on the industry’s performance to which the stock belongs. If the industry performs well, there is a good chance that it may generate many multi-bagger stocks.
Remember, fundamentally strong stocks will always yield returns, regardless of market conditions. Thus, it is crucial that you analyse a stock from the lens of its fundamentals to assess its true potential. All these points come in handy when you are trying to answer the question of how to pick multibaggers.
2. Analyse the valuations
If you have spent a fair time in the markets, you would well know the importance and buzz around valuations. In simpler terms, valuation is the process of determining the total worth of a company.
To find the next best multibagger stocks, you need to have a reasonable understanding of a company’s intrinsic value. You can use various valuation techniques like the Relative Valuation method, the DCF (Discounted Cashflow) method, or the Absolute Valuation method. Moreover, you can also check various ratios and metrics like P/E ratios, debt to equity ratios, P/B ratios, and more to find the true standing of a company.
However, there is a catch here! Finding high-valuation stocks and investing in them is not the ideal way to generate wealth. Also, it is not necessary that all high valuations stocks will turn into multibaggers in the future.
It must be remembered that valuations can be inflated. Companies can create false valuations and buzz to attract investors. Also, positive market conditions can lead to a misconception that all companies are performing well and justify their valuations.
And thus, it is essential that investors study the valuations holistically, eliminating all market noise – what is the company’s intrinsic value? Is it trading at an inflated P/E ratio? Is the company model viable in the long run? Is the stock trading high only because of market conditions? If a company is borrowing excessively, it can be a red flag. Or if a company is trading a high P/E ratio, it could mean the company is overpriced.
So, in the end, only if the company justifies its valuation along with other factors can it become a true wealth generator in the future.
3.Study numbers and balance sheets
Once you obtain a sound judgment on the fundamentals and valuations, the next step, and arguably the most important one, would be to deeply study and analyse the balance sheets and financial statements of different companies.
This financial data is where you’d find the road map to your next potential multi-bagger. For instance, a company could be in the process of setting up a new plant or maybe in the middle of finalising a mega-deal. Such information is often hidden deep inside company data and can easily be missed. They can reflect deeply on the companies’ share prices and future growth potential.
However, it is impossible to study the financial data of every listed stock. Also, not every well-performing stock would turn into a multibagger. And thus, based on valuations, performance, fundamentals, market movement, and various other factors, you would need to filter stocks. For starters, you can do an initial screening of stocks that you think have good fundamentals and numbers. This screening can be based on RoE, ROCE, EPS ratio, and more.
Remember that balance sheets and other financial statements are a reflection of a company’s performance, both quantitatively and qualitatively. Furthermore, they can give you a fair idea of the company’s future prospects. By profoundly analysing financial data, you can be one step closer to finding the next best multibagger stocks.
4.Study stock movements
A stock’s history can be a good insight into its future movements.
While studying fundamental and financial data (valuations, ratios, and metrics) is paramount to gauging a stock’s potential, it is equally important to study a stock’s previous movements. This analysis can give a good idea of how a stock has been faring on the charts.
Is the stock trading high and low irregularly? Has the stock consistently been performing low? Is the stock unable to break a certain threshold level? Did the stock hold ground in turbulent times? The answer to all these questions can let you know if a stock has the potential to be a multi-bagger in the future.
Technical analysis can be an excellent way to go about here. You can analyse stock history and movements by employing statistical metrics and tools like ADX (Average Directional Movement Index), MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), Movings Averages, Fibonacci series, and more. You can also study volumes to understand the quantitative standing of a stock. This can give you a peak into the interest a stock generates. A higher volume indicates that a stock is in demand.
Combine your search for multi-baggers with technical analysis to gauge the next multi-bagger. However, technical analysis can be tricky and require in-depth financial knowledge. To make the task easier, you can always reach out to experts at TejiMandi. We are trusted by over 10,000 investors. The professional team comes with years of financial experience and takes every step to help you curate a portfolio that helps you reach all your financial goals. Reach out to us through our website to get started.
5. Compare the moat and growth potential
The Sensex, as of today, lists more than 5000 stocks. Also, there are countless sectors and industries that together formulate the markets. But amidst the grouping and classification, you would find certain companies and stocks that display a moat or a competitive advantage over others. This could be anything from product/service pricing, access to advanced technology, to innovation, and more. Naturally, these companies have a significantly higher chance of exponential growth.
In fact, it could be argued that companies with an ‘X’ factor have a great chance of generating multi-bagger returns. As companies renovate and redesign their products and services to stay abreast and competitive, they can receive premium pricing and valuations, boosting their future growth. Small-cap companies that expand aggressively can make for a good bet here and turn into small-cap multibaggers.
Not just that, companies should also depict good growth potential and margins. Companies with irregular growth cycles or stunt growth may not make for a good multi-bagger stock. For a brief time, they may appreciate in terms of price and valuations, but if they lack potential, they are most likely to fall.
6. Study young and promising companies
It’s unlikely that you will find your next multi-bagger stocks in well-established companies or blue-chip stocks. Indeed, they may appreciate and do well, but if you wish to have a solid bet, young and promising companies must be analysed.
If you study stock market history, you will realise that most multi-bagger stock companies started out as fresh, unrecognised companies. So, start screening new entrances in the market and watch their potential moves.
When you invest in a young or relatively new company early on, you commit to its future growth. And, if the company does well according to your analysis, you can record reasonable gains. However, since the performance of such a company can only be predicted and there is no surety of its growth, such an investment can be risky. It is essential that you have a well-managed and diversified portfolio to sustain any loss that may arise out of a bad decision. Want to learn more about portfolio diversification? Read our article on Stock Investing in India – What is Diversification of Portfolio? on the Teji Mandi Blog.
Also, time is a critical factor concerning multi-bagger stocks, and young companies may have this favourable factor on their side, taking them one step further in the race to become a multibagger. So, if a young company gets the right footing in the market and depicts health growth and numbers, it could quickly be your next multi-bagger!
7. Look for strong management
As popularly stated, a company is only as good as its management. And this cannot be stressed enough when concerning multi-bagger stocks. A company could have all the numbers, metrics, even a moat, and good fundamentals. But, if it is stifled with lazy, corrupt, or incompetent management, it is likely to fail. Yes Bank stock and its aftermath with poor and unscrupulous management is a good example here.
Strong management is a factor you would find in arguable every present and future multibaggers. This is because it is the management that steers the company and decides the direction. It is also the management that sits on all important make-or-break company decisions. In fact, by studying just the management, their words, and general overview, you can get a fair idea of the company’s mission and future prospects.
All major corporations today that sit on several multibaggers can boast of this common factor. From Reliance and Infosys to Tata and others, all had very humbling beginnings in the stock world. Their management has been a significant factor in their growth and success.
Now, it may not be very difficult to study the management of a company. How the management handles changing government and economic and business policies, how they react to new threats, technological changes, and competition, and how much discipline they follow with their financial obligations – all can give you a window into the management of the company.
No company can succeed or grow without capable and efficient management. It would not be untrue to state that management is the backbone of a company. And hence to spot a multibagger, you need to analyse the management capabilities carefully.
8. Watch out for IPOs
The past 2 years have been golden for companies looking to go public as several companies launched their IPOs and raised millions. IPOs allow you to invest in companies right when they go public for the first time. How does this help? You can lock in quality stocks at nominal prices and create a portfolio of strong stocks that may have the potential of becoming long term multibaggers.
You can expect to record multibaggers from IPOs, provided they are well received and list at a premium. Nazara Technologies, MTAR technologies, Tatva Chintan, and many more listed nearly doubled their offer price, instantly generating returns.
However, it is important that you analyse the IPO, its metrics, numbers, offer price, and more to make sound decisions. If IPOs have made wealth, they also have destroyed some. Big names like LIC and PayTM tanked on their listing and also currently trade below value.
IPOs can be a good place to start your hunt for multibaggers. No matter how they perform in the short term; if they are quality stocks, they can generate multibagger returns over a period of time.
9. Constantly monitor and track markets
It is important to understand that stocks do not function in isolation. There is a web of factors, all interconnected, that influence the movement of shares. This could range from macro factors to micro factors. That said, it is necessary to analyse and monitor stocks holistically to determine their true performance in a market.
Stocks function in cycles of highs and lows and boom and busts. These cycles should not be the only factor to influence your decision-making. Remember, finding multibagger stocks is a long-term game. A stock could currently be trading low due to several factors. However, if it is a fundamentally sound stock, it will generate returns over the years and work as a long term multibagger.
For instance, in a period of recession, auto companies may trade at a deflated value. However, it might only be a phase, and the stocks may pull up again once conditions turn normal. When you constantly monitor markets, you will see good instances of such stocks (that are down only due to market factors). Now, these could make for excellent investments and even may generate multibagger returns.
Having said that, it is important to realise that the opposite may also be true. For instance, when the Covid-19 pandemic broke, markets and most stocks traded at half valuations. Many investors blindly invested in several stocks hoping to generate multi-bagger returns when the markets turned moderate. However, low-quality stocks never returned as expected.
Remember, quality stocks will do well regardless of market conditions. Poor stocks will not do well despite market conditions.
So, while you analyse a stock fundamentally and technically, keep in mind that market conditions are equally important too.
You have now understood in detail how to pick multibaggers. Remember that all multi-baggers are good stocks, but not all good stocks are multi-baggers. This implies that from a plethora of quality stocks, only a few will return multi-baggers. And so, you need to thoroughly analyse a stock through fundamental, technical, qualitative, and quantitative analysis to find the ‘X’ factored multi-bagger. All of this can be quite tough to look into yourself. The experts at Teji Mandi help you keep a track of your investments to help you get the best returns. Reach out to us on our website to know more.
What is the ideal duration for a potential stock to become a multi-bagger?
The popular chemical company, Alkyl Amines Chemicals, traded around ~ Rs. 22 in August of 2012. In August 2022, the company share touched ~Rs. 2967 per piece. It took Alkyl Amines Chemicals a decade to generate a gravity-defining 13,345% return.
Adani Power traded at ~Rs.40 in 2020. In 2022, the stock has risen to ~ Rs. 410 a piece. In 2 years, the stock turned 10-bagger.
These two vastly different stocks from different industries and periods describe the polar ends of the multi-bagger concept in reality. So as you can see, there is no standard time frame in which a stock can turn into a multi-bagger. It could range from a year to 5, or 10, or even 25!
During this period, a stock may experience several cycles of high and low and many bull and bear markets. It may even remain stagnant for a good period, testing the investors’ patience. And this is when all the qualitative and quantitative aspects come into the picture – is the stock really worth the time? Has the stock lost its growth potential? Is there a new entrant in the market? Has a policy changed dented the stock? And countless such questions.
So, if you are looking for an ideal duration, there is none. In an interweb of factors and market movements, stocks could move by defying every principle of investment.
Examples of multi-bagger stocks
Eicher Motors can be amongst the best multibagger stocks. This stock traded at a paltry Rs. 9 in 1998. As of 2022, the stock sits at ~Rs. 2360 per piece. The stock grew 262 times in the 20-23 years!
A popular multi-bagger and a favourite of the late private billionaire investor, Mr. Rakesh Jhunjhunwala, is the Titan stock. This stock, in 2000, traded at ~Rs. 2.5. Currently, it hovers around Rs. 2565. Bajaj Finance also traded around the same value in 2000. Now, it stands at an unbelievable price of~Rs. 7360 per share. JSW Steel once traded at 0.50 paise. Yes, that’s right! It is currently trading at ~Rs. 690!
Another recent example of multibagger for 2022 year is the Adani Group stocks, which have been in the news for the better part of the year. Almost all stocks of this group have turned into multi-baggers in less than 3 years, propping Mr. Gautam Adani to the top 3 wealthiest people globally. In fact, Adani Total Gas is currently trading at an astronomical 790x P/E! Adani Green Energy stands at 758, against an industry average of 19!
There are countless examples of such astronomical returns that stocks have recorded over the past. But the question here is – How to pick multibaggers? Let us see where you can go wrong.
Finding a list of multi-baggers over the internet! Is it the right thing to do?
Surf the internet, and you will find an overload of sites and stock screeners displaying all available information on current and potential multibagger stocks.
There is also no dearth of stock gurus and influencers who promises ‘XXX’ returns. There is ready information available at a click, and you would not be required to do any research or analysis. This sounds like a very lucrative option.
However, is this the right way to go about when dealing with multi-bagger stocks? Can a simple list or a table accurately present to you all data concerning a multi-bagger stock? Can online trade gurus and pandits be trusted? In fact, the larger question is – Are the data, videos, and information presented on multi-bagger stocks accurate and reliable?
The answer to these questions is complicated. There is, in reality, no guarantee on any data presented on the internet, especially when concerning stocks. You could be risking a great deal by blindly relying on any information online. Not to mention various social media channels that constantly make calls and predictions and trigger you to follow in their footsteps. Also, relying on stock market influencers and random videos on the internet can be an invitation to disaster. Moreover, even the news channels are not always a reliable source of getting all this information. To know more about this, read our article on ‘Why you should not follow buying and selling from news recommendations’ on the Teji Mandi Blog.
As an investor, it is important for you to realise that stock investing or hunting for multibagger stocks is not as uncomplicated as it appears. Even after years of experience and knowledge, individuals have failed to accurately predict markets and share movements. It requires time, effort, and patience to generate wealth from equity markets.
When concerning a multibagger stock, traditional methods can be your best bet. With thorough fundamental analysis, and a solid grip on balance sheets, and valuations, you can explore the true potential of stocks and get a realistic probability of their ability to turn into a multibagger.
The process of reading, understanding, and comparing balance sheets, valuations, and financial data can be tedious. There is a good chance that you may feel overwhelmed by the amount of information and data presented. But it is to be remembered that only the data in a company’s financial statements can give you insight into numbers and other relevant information that may otherwise not catch attention. Here is a helpful guide on the same. Read our article on ‘How to read a company balance sheet before buying its stock?’ on the Teji Mandi blog to get all the information you need.
Now, if you find yourself stuck in low-quality stocks, the best thing would be to exit them and cut your losses. In the end, an intelligent approach combined with a good understanding of your risk appetite and time horizons can help you find the next big multibagger stock.
Why is the process of finding multibaggers so tough? Why are there too many challenges in the way? Let us find out.
Why is it challenging to find multi-bagger stocks?
As discussed above, multi-bagger stock requires high research and patience from its investors. Most investors simply do not have the patience to commit to a stock for a long period of time. The goal is quick profits, which is quite the opposite of the concept of multi-baggers.
Furthermore, investors fail to read obvious signs of trouble from their investments. Instead of researching, they opt for short-cut methods like chasing low P/E stocks or listening to online advice and tips.
Most investors are also in a rush to book their profits. For instance, if they see their investments zoom 2X, they quickly wish to book profits and exit. Here, if the stock generates 10X, they will remain at a substantial loss. An apt example of a long term multibagger here can be MRF, which zoomed from ~Rs. 1500 at one point to Rs. 88,777 today! This is the kind of stuff that multibagger stocks are made of! Investors kept booking profits in between, not giving the stock a chance to reach its true potential.
Investors could also go wrong on basic math. Investing in blue-chip stocks and looking for them to turn 10-bagger or 20-baggers is too ambitious. Their potential has already been trapped with little upside remaining.
In other words, to get your hands on a multibagger, you need to make reasonable bets and have the patience for the bigger picture to play out to bag multifold returns.
The trap of multibagger stocks
A lot has been discussed on what multi-bagger stocks are, how to find them, do’s and does, and more. But, are multibagger stocks the right way to generate wealth? How to pick multibaggers to avoid locking up your funds? Is the quest for higher returns making multi-bagger stocks a trap?
Well, experts argue both ways. A well-analysed bet on a fundamentally strong stock can work wonders for your portfolio. However, the same set of stocks can lock your investments for a long period, making the entire process rigid and counterproductive.
Let’s read how the mirage of finding multi-bagger stocks can trap your potential growth and your portfolios.
1. Risk
To take advantage of quality stocks and their growth, you have to be invested in heavy quantities, quite literally.
Say, for instance, XYZ stock is trading a Rs. 20. You buy 50, taking your total investment to a paltry sum of Rs. 1000. Now the stock zooms to 200 in the next 24 months. Now your investment value stands at Rs. 10,000. However, imagine had you bought 1000 stocks of XYZ company. Then, your valuation would stand at Rs. 2,00,000!
Naturally, quantity directly affects your returns. Higher the quantity, the more the returns. But, high quantity also means high risk. In the above example, If XYZ stock moves to Rs. 10 when you buy 1000, your investment value is literally halved.
This quantity commitment can feel like a trap.
2. Time
Time is arguably the most critical factor concerning multibagger stocks. It may take several years, in fact, decades, for stocks to generate multi-bagger returns. On the contrary, a few stocks may turn into multibaggers in just a few months.
In this sense, you have no control over time and when a stock starts generating returns. You are trapped with the stock for years. You may invest in a potential long term multibagger, but if the stock fails, your entire time locked becomes futile.
3. Diversification
Trying to invest in multibaggers can limit your diversification. As your funds are locked in a few stocks, you may not be able to mitigate your risk and, more importantly, may not be able to diversify. This could include being limited to equities only and not investing in other securities.
Also, your bet may remain on one sector. Now, this may work or fail. However, while you stay invested here, you miss out on potential returns from other stocks and sectors. In this sense, multi-bagger stocks can trap your diversification potential and limit your exposure. And as the golden rule of investing says – concentration is an invitation to disaster.
4. Emotions
It is natural for you to get attached to your portfolio, especially if you have been invested for a long time.
Sometimes, ego battles can shadow the holdings. Because of this, investors may not be ready to see red flags or potential reasons why they should exit a stock.
But ultimately, your profits are real only when you book them, i.e. when you sell or exit the stock. Timing your exit is the most important thing when dealing with any type of equity, whether it is in the short or the long term. For example, take the glass manufacturing company – La Opala RG. The stock surged an impressive ~4000% from 2011-2017. But, fell more than 50% in the next 2 years. Had investors exited the stock in 2017, they would have been sitting on exceptional returns.
5. Penny Stocks
Unlike mid-cap or large-cap stocks, penny stocks form a ripe ground for the creation of a multi-bagger. They trade at extremely nominal prices and are mostly undervalued and under-recognised. In other words, a fundamentally strong penny stock has all the reasons to turn into a multi-bagger. And there are countless examples of the same.
But it is also important to note that there is very little data available when concerning penny stocks. So you may not have any parameters, metrics, or numbers to gauge future and past performance. Naturally, investing in these stocks could be extremely risky and cause acute capital loss.
In the end, the trap of multi-bagger returns is real – all from the perspective of risk, diversification and time. But does this mean you should not look for such stocks? Are such investments even worthwhile? Let us find out.
Do multibagger stocks make for suitable investments?
In the end, ‘do multibagger stocks make for good investments?’ is the question that circles the mind of most investors. If you manage to register the profits, you can conclude that multibaggers are great wealth generators.
But, as discussed above, multibaggers can be both a boon and bane. It can trap investors but also generate exponential returns for them (provided the bet proves right). In this sense, landing a multibagger stock can be a medley of deep research and luck. A fundamentally low stock (due to various reasons) may rise to generate excellent returns, while a quality stock may be struggling on the charts.
Multibagger stocks make for a good investment if you have a high risk appetite, can digest market up and downs, and have a long-term horizon. For instance, say you have invested a good amount of money in a particular stock you feel would generate multibagger returns. Now, you suddenly need to commit to a major financial obligation. If you plan to liquidate your holding here, you could be losing a great deal of money.
Take another instance where the markets are crashing hard. You want to cut your losses, and you sell your holdings. Now, not only have you registered a loss, but also lost on the potential of multibagger returns.
So, it is paramount that you understand your financial standing and viability because, at the end of the day, they would determine your returns from any market.
In conclusion
Multibagger stocks are those stocks that offer many-fold returns over the initial invested value. They can generate enormous wealth for investors, provided the right stock is chosen, after thorough fundamental, quantitative, and qualitative analysis. It is difficult to spot a multi-bagger and will require your patience and time. It is important to note that not all quality stocks will turn into multibaggers. The same is applicable to penny, small-cap, and mid-cap stocks. The investor’s selection and reasoning are essential factors to consider here.
Additionally, remember that the quest for multibaggers can trap you and limit the potential of your portfolio. So be careful when dealing with even the best multibagger stocks, as equity investments never come with a guarantee.
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