Multibagger Stocks, Penny Stocks, And The Difference Between The Two

Multibagger Stocks, Penny Stocks, And The Difference Between The Two
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You can have many goals for which you actively invest your funds. This can include funding your education, planning your wedding, or building a corpus for your retirement so you can have a secure future. While these may be the end goals for which you invest, the basic underlying thing that you look forward to is the multiplication of your wealth. 

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Characteristics of companies that have multibagger stocks

 Whenever you invest, you expect some returns. Based on your risk appetite and your choice of investment, the returns that you earn shall vary. In general, the higher the risk you take, the higher the return you get. In this respect, investing in equity funds is a favourite strategy of those who are less risk averse and want multifold returns on their investments.

However, equities are subject to market fluctuations. Because of this, you can either earn an excellent return or things may even go south for you if you make a wrong move. Having proper knowledge of the market and being able to analyse stocks is a basic prerequisite before you take up this investment option.

However, choosing good investments is only the most basic thing that you can do with proper market knowledge. If you go further into it, you may be able to read into the performance of a company and estimate how its stock may eventually perform. This is when you can leverage your know-how and place your bet on stocks that have the potential to give massive returns.

A decent return that you can earn on your equity investments, which is commonly seen, is about 15%-20%. This is a good amount as compared to the returns from other sources of investment and helps you beat the effects of inflation as well.

However, if you study the market in depth, you can identify certain stocks that have the potential to give you exponential returns. Something more than even 100% of your investment value. Such stocks are called multibaggers.

On what basis are such stocks classified? What are the defining characteristics of such stocks? Are there other types of stocks that you can buy that have a lower market price? What factors must you consider when wondering how to pick multibaggers? We aim to answer all of these questions. Let us delve deeper into this concept. As we discussed above, certain stocks are capable of fetching exponential returns. Such stocks are termed ‘multibaggers’. The term ‘multibagger’ was first used by Peter Lynch, an American philanthropist, investor, and manager of mutual funds. He defined the term ‘multibagger’ in his very famous book, ‘One Up On Wall Street’.

Multibagger stocks are those that provide returns that are higher than their costs of acquisition. That is, you effectively cover your investment value and earn more return over and above it. Thus, you can say that the best multibagger stocks provide over 100% returns. These equities soar in value, and those who invested in them before their values took flight benefit from exceptionally high returns. 

What are multibagger stocks?

Stocks that have the potential to turn into the best multibagger stocks can be found in industries that are fast-growing and in markets that are emerging at a high pace. India is considered the fastest growing economy in the world, thus providing an ideal ecosystem for the emergence of multibaggers.

That being said, not every stock in India can become a multibagger. In fact, very few stocks show such a performance, which is dependent on various factors. Let us see what these factors are.

Characteristics of companies that have multibagger stocks

If you are wondering how to pick multibagger stocks, this is something that you can refer to. While there is no set rule of what all factors lead to the turning of a stock into a multibagger, there are certain characteristics that most such stocks possess. Here are a few qualitative and quantitative factors that define the nature of the multibaggers for 2022 year:

Multifold growth 

The most basic characteristic of a multibagger stock is that it displays multifold growth in its value. Initially, such stocks are traded at very low values in the stock market. As a company grows and shows exceptional performance, its stock follows suit. 

There are various factors that lead to the multifold growth of companies. All these factors together form the business environment. This includes the level of competition that the company faces, the industry that the company operates in, the availability of raw materials and resources, and more. 

While such factors are common for all companies that operate in the same environment, not all have stocks that become multibaggers. What differentiates those few companies from the rest is how quick they are in taking advantage of changes in the business environment. For this, it is essential for the company to analyse the environment for opportunities and threats, identify the openings, and take the necessary steps to become a first mover. Only those companies that are able to create a unique identity and advantage for themselves are able to reflect the same in their stocks. Another thing that becomes important here is whether the company can create strong entry barriers so that its presence is not eventually diluted when more firms enter the market.

For example, when you look at Asian Paints, it is one of the biggest names in its industry. The strong brand value is reflected in its share as well, which has become one of the best multibagger stocks. 10 years ago, the Asian Paints share traded at a mere ~Rs. 440. As of 16th September 2022, its stock price was Rs. 3,313.25, displaying a whopping increase of 718.31% over 10 years! 

Essentially, multifold growth for a company is a consequence of two main things – excellent top management as well as a good amount of investment in research and development. Let us see how. 

Excellent management 

The management of a company is made of the crucial decision makers. It is their foresight, planning, and action that translate into how the company functions. The consequence of proper functioning is superior results. A management that is not only able to envision great things but is also able to create a detailed blueprint of how it is going to achieve the vision makes all the difference.

The top management must be of leaders who are experts in their field. Not just that, these leaders must be people who are efficient, well-trained, able decision-makers, transparent in their work, ethical, and of high morals. As they lead the company, they set an example for their subordinates to look up to. This also sets the tone of the work culture in the company. 

For instance, it was the ambitions of Jamsetji Tata that led to the incorporation of the Tata Group. The same passion and philosophies were followed by all of his successors. Today, even generations later, Ratan Tata has held the brand name high. As a result, the Tata Group has a number of multibagger stocks in its name, including those of Tata Motors, Tata Power, and Indian Hotels Company. These stocks have also gained more traction recently, making some of them the best multibaggers for 2022 year. 

Greater investment in research and development

Investing in research and development can go a long way. This is because growth is defined by how well you understand the needs and wants of the potential customers. Only once you have identified this can you develop the required products and services that will actually sell. 

However, just product development isn’t all. The company must also monitor the performance of the product in the market and actively get customer feedback. This allows them to bring modifications to the product, resolve complications, and roll out updates. 

Moreover, research is key to being about innovation. Coming up with new ideas and innovations in its field gives the company an upper edge. This leads to robust growth, which is seen in its share price. 

Startups that come up with ideas that have never been seen before have the potential to become market leaders. If they issue equity, their stocks are likely to turn into multibaggers. Apart from this, it also requires a great deal of research to get the shares of the company listed on the stock exchange in the first place. Thus a company investing a considerable amount in research and development is likely to push out the best mutibagger stocks. 

Having both, a strong management and high investment in research and development lead to excellent financial results. Let us see how the best multibagger stocks perform financially.

Strong financial performance 

There are various factors that indicate a strong financial performance. It is seen that in all companies that have multibagger stocks, these indicators show favourable figures. Taking input from the financial statements, analysts as well as the company calculate certain financial ratios that make it easier to gauge the performance. These include the P/E ratio, Debt-to-Equity ratio, and financial and operating leverage, among others. 

In addition to this, how well the business has scaled also improves its performance. High scalability allows the company to get the benefits of economies of scale, thereby lowering its production costs. This allows the company to make more profits, which again, reflects positively on its share price. If you are wondering how to pick multibaggers, you can start by looking at the financial metrics of the companies whose stocks are in question. 

For instance, looking at the P/E ratio, multibaggers tend to be at the higher end. It may not  be the best indication, but can help you filter out the stocks that are providing very high returns. The chemicals conglomerate, SRF Ltd, has a P/E ratio of 44.27 as against a sectoral P/E ratio of 14. It traded at approximately Rs. 44 in September 2012. Two years later, in September 2014, its share price was ~Rs. 140. At present, in September 2022, the SRF share is trading at ~Rs. 2,800, recording a 6,264% or a 64x increase in its value in a period of 10 years!

Just like this, we have seen a number of stocks turn into the best multibagger stocks. Let us look at a few examples. 

Examples of multibagger stocks

While there are numerous examples of multibagger stocks, here are some of the best ones to illustrate the magnitude of their growth. 

Deepak Nitrite Ltd. is an Indian chemical manufacturing company. In September 2018, the share of Deepak Nitrite Ltd. traded at ~Rs. 280 apiece. In a period of 5 years, its value has gone up about 640%! It currently trades at Rs. 2071.70 per share, as of 19th September 2022. 

Another example of a long term multibagger is the share of Tata Elxsi Ltd. In September 2013, the Tata Elxsi share traded at a mere ~Rs. 92 per share. Over 9 years, the stock has grown tremendously, owing to the exceptional performance of the company. Its scrip currently stands at Rs. 8,696.40 per share, showing a massive 9352% or 94x growth in this 9-year period. 

In September 2012, the Astral Ltd. share traded at about Rs. 22 per share. The stock gained traction over the decade, and stands at ~Rs. 2375 in September 2022. The unbelievable growth of about 108 times is an excellent example of how the magic of multibaggers works. 

Now that we have understood what multibaggers are in detail, let us know about another category of stocks that are quite different. These are low-valued shares, also known as penny stocks. Let us find out more. 

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What are Penny Stocks?

There is no official definition of a penny stock; however, stocks that are valued at less than Rs. 10, or in single digits, are classified as penny stocks. Such stocks are of companies that are usually less known, and whose shares are not very popular among a large chunk of investors. 

A major reason for their minimal popularity is that there is not a lot of information available about the stock fundamentals and the company’s finances. Whatever details that you, as an investor, can find may either be unreliable or inaccurate. This is because it may come from a less trusted source. Companies do not make all information widely available to the public, and chances are that the performance metrics they give out present an unrealistic picture of their business. There is also a lack of compliance when it comes to such stocks. 

Most investors ignore such penny stocks. Even if they do invest in them, more often than not, they exit from the trade after a short while. This is why the prices of penny stocks are mostly subject to sudden surges and declines. The lack of trading keeps them stuck on a low share price. 

However, such stocks are ideal for beginners. If you are new to the stock market and want to learn your way around it, you can easily start investing in penny stocks. Since the value is low, you do not require a large investment to acquire a good portion of shares. Practice trading on these stocks to learn more about market timing, read stock performance indicators, do research, and more

Before we get into the depth of penny stocks, let us take a look at some examples for better understanding. 

Examples of penny stocks

In most cases, penny stocks come from less known companies. However, that is not a rule. There are more established companies as well whose shares are traded at low values. A good example of this is the Vodafone Idea share. At present, the Vodafone Idea share trades at just ~Rs. 9 per share!

Other examples of penny stocks include MFL India, which presently trades at about ~Rs. 1.2 apiece, CNI Research at ~Rs. 2.7, and SBC exports at ~Rs. 8.75. 

Let us get some more details about penny stocks and understand how they work. 

Characteristics of penny stocks

Despite not having a theoretical definition, penny stocks can be identified based on certain characteristics. These features have been noticed as a common factor of all stocks that are classified in this category. Let us understand these in detail. 

Penny stocks are low in value

As mentioned above, penny stocks have a very low price, sometimes even in single digits. This is because of many reasons, including the lack of information about the company and the stock fundamentals. 

Apart from this, the low value is a result of a lack of trading. The market price of a share is determined by the forces of demand and supply. If the number of investors who are looking to buy a share is high and more investors purchase a share, its price inflates and keeps going up. As penny stocks are not a popular trade, their value remains unchanged and low, unless there is a major announcement that brings the penny stock to light. 

Penny stocks are less liquid

Penny stocks are less liquid majorly due to the fact that they have low market capitalisation. The trading volume of such stocks is very low, making it a task for buyers and sellers to carry out the trade. If you own a penny stock, it may be challenging for you to sell it, as not a lot of investors are willing to buy such a share. 

If you do own such shares, a good strategy can be to hold it for the long term. Since the acquiring cost is not very high, chances are that over time, its prices will zoom up, allowing you to book a larger profit. 

Penny stocks have low entry barriers 

In general, prices of stocks can be very high if the company is well known and reputed. Not all investors have the finances to invest in the high-priced stocks of popular companies. However, you do not require a large sum of money to invest in penny stocks. 

Since the prices are low, you can enter the trade with lesser funds and invest your money in the market. This is especially a great opportunity for you if you have just started trading in the stock market and do not want to invest a large chunk of your saving till you have learnt how the trades operate. Thus, we can say that there are little to no entry barriers for investors to get their hands on penny stocks. 

Technical analysis may be difficult for penny stocks

Technical analysis refers to the analysis of price movements by employing tools like charts and statistical data. This helps you understand the trends in the market price of shares, predict future price behaviours, and find a viable entry point to buy a particular share at the best price. 

In the case of penny stocks, technical analysis is not very easy. This is because the price quotes of such stocks are scarce and infrequent. Moreover, the bid-ask spreads are very wide, making it tough for you to sell your shares. The unpredictable pricing, along with a lack of price history, makes it extremely difficult to conduct a technical analysis to give accurate results.   

Technical analysis can be a tough thing to carry out for not just the penny stocks, but for all stocks, if you don’t have the expert financial knowledge and know how to correctly use these tools. However, it is an important aspect when you are thinking of investing in the stock market. The experts at Teji Mandi offer active advice on how you can build your portfolio efficiently to meet all your financial goals. Reach out to us through our website to know more. 

Penny stocks may generate high returns

Penny stocks do not necessarily remain at low prices forever. There are a number of companies with penny stocks that have the potential to grow and expand. If such companies take advantage of their growth opportunities and show a consistently strong financial performance, chances are that their stocks will appreciate in value. This can fetch you good returns on your minimal investment. 

However, you must note that this is not a very common scenario. Thus, it is advised not to diversify among penny stocks, but to make them a part of your diversified portfolio. This means that you can invest in selective 2 or 3 penny stocks and hold them as a part of your overall portfolio. Since these are high-risk investments, they have the potential to give high returns; but at the same time, they can tank very fast, resulting in losses. 

If you hold on to penny stocks for the long term, you are likely to see a considerable appreciation in their value, fetching you decent returns. Based on this, there are penny stocks that have turned into multibaggers as well. Let us learn more about these multibagger penny stocks.

What are multibagger penny stocks?

Multibagger penny stocks are those penny stocks that have appreciated in value over a period of time. However, just a nominal appreciation does not make them multibaggers – they are classified as such stocks only when they generate 100% or more returns. 

For instance, if a share is valued at Rs. 4 initially, and goes on rising to trade Rs. 8, you can classify it as a multibagger, as it fetches you a 100% return. As it grows further, it can become a two-bagger if it trades at Rs. 12 apiece, and a three-bagger if it trades at Rs. 16 per share. In the former case, you will earn 200% returns, while in the latter, the return you get will be 300%. 

Multibagger penny stocks are rare but can fetch you exceptional returns. While most investors ignore penny stocks while investing, they also ignore the odds that such a stock can become one of the best multibagger stocks. It does not matter much if the company is operating with a low market capitalisation. If it continues to build its performance, takes on more and more growth opportunities, presents a strong financial result, invests in research and development, and is led by strong-sighted leaders, it can very well rise in value in no time. The share prices of such companies soar and can bring you multibagger returns!

These are the two categories of stocks – multibaggers and penny stocks. As you may see, the two can be overlapping in their characteristics; that is, a penny stock can turn into a multibagger! But individually, these two categories of stocks vastly differ. Let us look at the differences between the two. 

The difference between multibaggers and penny stocks

As discussed above, multibagger stocks are those that have shown exceptional growth and massive returns. Whereas penny stocks trade at nominal values, that is less than Rs. 10. Here are other major factors based on which you can differentiate between the two categories of stocks:

Stock fundamentals

Multibagger stocks usually come from reputed companies who have displayed exemplary financial performance and have high growth potential. Such companies are also transparent when it comes to financial reporting, and accurately update their results to the public from time to time. Since all information about their performance is readily available, such as their balance sheets, income statements, and operational reports, it is easy to conduct a fundamental analysis of their stocks. 

Moreover, a history of their stock’s performance is also available, making the comparison as well as prediction easier. Thus, when we talk about multibaggers, we can delve deep into past stock performance, see if the company has the potential to grow, and how the company’s performance can impact its share price. 

On the other hand, not a lot of reliable and accurate information is available about companies that have penny stocks. This further makes it difficult to analyse the stock fundamentals and research its potential to provide decent returns. Moreover, analysis based on past stock movements is also difficult, as there is usually not much variation in the share price due to a lack of volume traded. Moreover, as stated before, a technical analysis based on charts, bid-ask spreads, and other tools is mostly always impossible. 

To learn more about how a fundamental analysis works and can be conducted by you, read our A-Z guide on analysing stock fundamentals on the Teji Mandi Blog. 

Risk involved

Multibagger stocks are undervalued stocks that have the potential to grow in an economy that is growing. To make good profits on such shares, you must buy a good quantity to gain multibagger returns. However, since a large amount from your funds can get invested in these stocks, in the off chance that there is a market downturn, you are bound to lose your returns. However, this is the case with any stock in the stock market. To reduce the risk involved, it is advised to build a strong and diversified portfolio. You can also have a team of professionals managing your portfolio, who can adjust it from time to time to minimise potential losses. 

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On the other hand, penny stocks are associated with higher risk. More often than not, a lot of information on the company’s finances and performance is not available. Moreover, there is barely any price movement in penny stocks, which can keep your funds parked in an uncertain investment where returns are not seen. Since the buying and selling levels are also low for penny stocks, exiting the trade can be difficult, thereby increasing the risk even further. 

You must diversify your portfolio in a way that your overall risk is balanced. Then if you even face losses in one particular investment, the overall loss is mitigated by gains that you earn in another place. But for this, you must know how to calculate the risk of your portfolio. To learn more about this, read our article on How to Determine Portfolio Risk on the Teji Mandi Blog.

Market capitalisation

Market capitalisation is the metric that indicates a company’s value based on its stock performance. Market capitalisation is calculated by multiplying the number of shares that a company has listed on the stock exchanges with the current price of the share. 

Multibagger stocks tend to have very high share prices. Because of this, you can find large-cap as well as mid-cap multibaggers. Some examples of large-cap multibaggers for the 2022 year include the Titan Company and Bajaj Finance. Apart from this, you can also find small-cap multibaggers. One of the best examples here is that of Vadilal Industries. In December 2021, Vadilal Industries had a share price of ~Rs. 940. Its share has jumped to Rs. 2,489 (as of 19th September), showing a growth of 165% in 9 months, making it a multibagger for the 2022 year. It currently has a market cap of ~Rs. 1,798 crore (as of 19th September 2022).

Penny stocks have a very low share price and thus fall under the micro-capitalisation category. An example of such stocks is that of Mercy Metals Ltd. As on 19th September 2022, the share was trading at Rs. 9.25 apiece, with a market capitalisation of just Rs. 154.35 crores. 

Liquidity

Multibagger stocks are much more liquid than penny stocks. In fact, penny stocks tend to be extremely illiquid due to their low trading volumes. It is not easy to find buyers and sellers, thus if you have purchased penny stocks, chances are that you are in for a long term. It is thus important that you analyse your financial position and only invest that much amount that you are willing to lock up for a considerable period. 

Contrary to this, the best multibagger stocks are very liquid. The companies whose shares transform into multibaggers show strong growth and immaculate financial performance. The buyers of such shares are large, pushing the demand for multibaggers high. This adds liquidity to them. 

To understand the concept of stock liquidity better, read our article on ‘How to assess liquidity in stock investments?’ on the Teji Mandi Blog. 

Return generation

Multibaggers are classified as stocks that provide exceptional returns, even more than the cost you spent on acquiring them. With at least 100% returns, the best multibagger stocks will help you generate high returns, making them the best investment choice in equity markets. However, the return that a multibagger van provide varies. Some stocks stay within the range of 100%-200% returns, while there are also that may fetch you returns over a 1000%!

Contrary to this, for penny stocks, high returns are less probable. You may choose to hold them for a long term, but only a few appreciate much in value to fetch you the large returns that you may be seeking. Try to invest only a portion of your funds in such stocks, that too if you have a high risk appetite. Since the risk involved is more, higher returns are also expected. Thus, chances are that these penny stocks may rise so much in value that they turn into multibaggers. However, this is less likely to happen. 

This sums up the difference between the two categories of stocks. Let us summarise the differences in a tabular form: 

Basis

Multibagger Stocks 

Penny Stocks 

Stock fundamentals 

Easy to analyse stock fundamentals due to readily available information. 

Tough to undertake a fundamental and technical analysis due to meagre or inaccurate information. 

Risk 

Comparatively lower risk involved. 

High risk involved.

Market capitalisation

Multibaggers can fall in the small-cap. mid-cap, as well as large-cap categories. 

Penny stocks are part of the micro market cap category since they have a very low share price. 

Liquidity

Most multibaggers are highly liquid with ready buyers and sellers in the market. 

Penny stocks have very low liquidity and it may be difficult to exit them.

Return

Multibaggers provide manifold returns, at least 100%, thereby covering their cost of acquisition too. 

Penny stocks usually provide lower returns. To generate some substantial returns from penny stocks, you will have to hold them for the long term. 

In conclusion

Multibaggers are those stocks that show exceptional growth over a period of time. Due to a massive increase in their value, they are capable of extending very high returns – at least a 100% – on your investments. This makes long-term multibagger stocks highly sought-after. 

On the other hand, penny stocks are stocks that have a very low market price, even less than Rs. 10 apiece. Such stocks are mostly illiquid and barely ever show a major change in their price. 

It is important to understand the meaning of these two categories of shares and invest wisely in them. While some penny stocks have the potential to become multibaggers, they remain two vastly different categories of shares. Understanding the difference between the two can go a long way. 

Before you jump into investing in the equity markets, it is important to attain financial knowledge and know the in-and-outs of the stock market. But if you lack confidence, don’t let that stop you from investing. You can always reach out to us at Teji Mandi and get active advice on portfolio management from our experienced experts. Trusted by over 10,000 investors, we aim to help you reach your financial goals seamlessly. Reach out to us today to get started on this journey!


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