If you are a stock trader and have some trading experience, you must have heard about the Multibagger Stocks and how profitable they’re. So in this article, we are going to learn the 10 Ways To Identify And Pick Multibagger Stocks.
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So before that;
What Are Multibaggers Stocks?
Multibagger stocks are equity stocks that give a return of more than 100%. The term Multibagger was coined by Peter Lynch in his book One Up on Wall Street in 1988.
How To Identify And Pick Multibagger Stocks?
There are literally thousands of stocks listed on the stock exchanges and many of them proved to be Multibagger in the past and some of them will be in the near future.
So, it is easy to identify and pick Multibagger stocks? Well, it is very difficult, but with certain criteria and tricks, you can easily identify and pick Multibagger stocks.
Many studies found that small-cap and mid-cap stocks have a greater chance to be Multibagger stocks compared to large-cap stocks, at the same time these stocks possess higher risk as anything goes wrong than investors could make a loss.
There are various parameters, you should look for while picking stocks for Multibagger returns. So, here I am listing 10 things you should look for while picking Multibagger stocks.
1. Good Promoter And Top Level Management
Well, the promoters and the top-level management are the individuals responsible for the day to day activities in a company or business. They make decisions on behave of the company and the performance of the company solely depends upon them.
So while picking a stock for Multibagger returns, you should carefully research the promoter and top-level management of the company. Basically, stocks with corporate governance issues do not perform well in the market and you could end up with a loss if you choose a company with some corrupt promoter.
Always remember, you will get Multibagger return from a share if the promoters of the company are not substandard as it is necessary for the long-term sustainability.
2. Reasonable Debt
The debt level of a company is an important parameter, you should not ignore if you’re looking for a Multibagger stock. I am not saying companies with higher debt are bad to invest, but chances of getting a higher return on them are quite low, as with higher debt level the cost of borrowing increases significantly and that hampers the profitability of the company.
The debt is considered as the cost of capital, because of the interest the company has to pay. So if a company doesn’t utilize the debt properly, then there is a risk of default, so always look for a company with low or no debt. You can analyze a company’s debt using tools like debt to equity ratio and cost of debt.
Using the debt to equity ratio, you can easily compare a company’s debt level and find out, if the company has a reasonable debt or not. D/E ratio greater than 1 means the company has more debt than the cash from the equity shareholders that means, it is not suitable for investment. Always consider a company with a D/E ratio less the 1.
3. Asset Light Company
Another factor is the asset of the company, which wouldn’t be higher side, as a company with huge assets tends to have higher leverage and a lower rate of return. Mostly, asset-intensive industries like metals, oil and gas, construction, infrastructure company have higher debts and it is hard to find Multibagger stocks from these industries.
You will find the assets figure in the balance sheet of the company, posted every quarter, during the result announcement. Stocks from the service industry tend to perform well in the past and may continue in the future. So you should pick a company with assets on the lighter side to reduce the insolvency risk and to get a Multibagger return.
4. High Growth Non-cyclical Businesses Model
The most important factor to create value in the market is higher growth across all the economical cycles. The stocks should not be seasonal or cyclic, as most of the wealth of the company can be eaten by the economic cycles.
For example, commodity-related stocks get hit by economic cycles and it is very hard to find Multibagger return on them in the past and maybe in the future. Another segment is the utility stocks, most of their wealth gets decimated by comic cycles and seasons.
So it is very important to find a noncyclic and high growth stock for a Multibagger return in the near future.
5. Consistent Income
A company’s growth mainly depends upon its earnings and with growth in earnings, chances of being Multibagger increase. The company you are choosing for investment should post consistent income every quarter and year. A company with negative earnings or loss will never give you Multibagger return in an ideal scenario.
To find ideal and consistent earnings you can look up the price-to-earnings ratio, earnings per share (EPS), and PEG ratio of better evaluation of a company’s earnings. Look for a stock with at least 25% EPS growth annually to get a potential multi-bagger return.
6. Good Business Opportunity, Scalability, And Sustainability
Well, no business or company can sustain long without a good business opportunity. To generate good profit for its a company should have a good business opportunity to sustain in the market and need expansion to increase profits margin over the years.
The business should be well-diversified to counter the slowdown or recession and should not be over diversified. A good growth, and scalable company, from any of the segments like small-cap, midcap, or even large-cap can generate Multibagger returns for its investors.
7. Efficient Capital Utilization
Capital utilization is one of the most important factors for business, for potential growth and sustainability in the market for a longer period of time. Every listed company in the stock exchanges raised money in the past and probably in the future by selling their share or issuing new shares. So the money they got from their shareholders should be used efficiently in the business activity and for the company’s expansion to get higher profits in the future.
Effective capital utilization means using the capital raised from shareholders or through debt should be used optimally, but there is no way a normal investor can find out if a company is using their capital optimally or not. But, an investor can look at the company’s prospectus or future plan to get a better idea about its capital utilization to identify and pic a Multibagger stock.
8. Share-holding Pattern
The share-holding pattern reveals the distribution of equity shares among the shareholding bodies like the Promoter, Foreign institutional investors(FPI), Domestic institutional investors (DII), retail investors, banks, etc. So you must be thinking why the shareholding pattern matters?
Well, shareholding pattern matters because, by observing the shareholding pattern, you will know the quality of investors in the company. Another thing is that you will know the pledged shares of promoters and institutions, which clears their motivations toward the future growth of the company.
With higher promoter holdings, generally considered as good for the company, but there are many successful companies with zero promoter shareholdings. So while choosing stocks for Multibagger return you should always check the shareholding pattern of the company.
9. Other Important Ratios
Price-to-sales ratio (P/S), price-to-book value ratio (P/B), return on equity (ROE) are few important ratios that help investors to find a value stock for investment. Using these ratios you can compare different stocks from a similar industry, makes it easy to find a stock for potential Multibagger return in the future.
The important thing is you should invest in a stock with higher intrinsic value, but trading at a lower intrinsic value and these ratios combined with other fundamental analysis tools help you determine the intrinsic value of the stock to get a Multibagger return on the investment.
10. Business Turnaround
In many cases, there are companies suffering from losses, despite having a very good revenue probably due to various factors like huge debt, corporate governance issues, or because of inefficient management. In that scenario, the stock may fall to a very low level with unjustified market capitalization.
So, in that case, if the company is restructuring its business, or changing its management or slowly recovering from losses, then it may be a good choice to get a potential Multibagger return in the future. Smart investors get multi-fold returns on these stocks, but the important thing is to anticipate the positive turn around in the company.
The Bottom Line
The stocks you will invest right now for Multibagger return, you can also get other benefits like dividends, bonus, and face value splits that impacts the share price and your investments.
Another thing is patience, a stock will give you Multibagger return after a year or over a few years, that’s not certain.
Apart from looking for Multibagger stocks, you should also look for mispriced opportunities and panic selling the market to enter at the bottom in the good stocks.
Also, we also recommend you that don’t get in the trap of scam stars and pay for Multibagger stock tips and ideas, do your own research before investing.