We all dream of getting 2X, 5X, 10X, or even more returns. However, when we see headlines like ‘invest ₹500 and get ₹5,000 back’, we get an impression that something is fishy.
But guess what, there are ways to get multiplied returns, and one of them is investing in multi-bagger stocks. If you are an investor, you might have come across the term ‘multi-bagger stocks’ or multi-baggers.
Explore this article to understand multi-bagger stocks, how to identify multi-bagger stocks, and things to take care of while choosing them.
What Are Multibagger Stocks?
Multi-bagger stocks are those stocks whose value can increase significantly, thereby, giving you high returns.
For instance, suppose you purchased the stock of XYZ company at ₹100, and in the next two years, the stock price reached ₹800, then the XYZ stock is called a multi-bagger stock because it offered you 8X returns on your invested amount.
How To Identify Multibagger Stocks?
Are you confused about how to choose multi-bagger stocks? Here are the seven hacks that may help you identify future multi-bagger stocks in India.
1. Strong and capable management
As an investor, one of the most crucial factors affecting your stock returns is the company’s performance. The company’s performance highly depends upon the decisions taken by the internal management team. If the management is capable, the company’s likelihood of performing well increases.
To evaluate the quality and capability of the management, you may check on the companies’ governance practices, pledging of shares, discipline regarding financial obligations, etc.
2. Strong promoter holding
Promoters are those who either gave birth to the business or have control over how the company functions, for instance, founders, CEO, employees, etc. Therefore, it is essential to check whether the promoters have a significant stake in the company. If they reduce their stake, it may be a red flag as it may signal a loss of confidence in the business.
A higher and increasing stake of promoters suggests they are confident about and committed to the company’s growth.
3. Competitive advantage
The company’s competitive advantage, known as an economic moat, is a benefit that puts it in a superior position over its competitors.
For instance, the company ABC operates in the food and beverages industry and offers similar products as its competitors. However, it differentiates itself from competitors by providing sugar-free foods and beverages in addition to regular ones. ABC’s competitive advantage may attract health-conscious customers and thus help the company reap high profits.
The competitive advantage can help the company survive and grow in the long run.
4. Healthy earnings growth
As an investor, your investment returns highly depend on the company’s earnings. Therefore, if the company’s earnings are growing at a higher rate, so would your returns. You can easily find information about the company’s earnings from its financial statements and compare it with previous years to determine the earnings growth rate.
You may also check earnings per share (EPS), which can tell you how much the company is earning for each of your shares.
Also Read: How to Pick Good Dividend Paying Stocks
5. High-margin business
One hack you may use to identify future multi-bagger stocks is to find companies with higher margins. If the company sells products at a similar price as the competitors while producing them at relatively lower costs, it can have higher margins.
Moreover, if the company has fewer competitors in the industry, it may have higher margins, and such companies may have significant chances of offering amplified returns.
6. Good capital allocation
While hunting for potential multi-bagger stocks, you should look for the companies that allocate their capital in a way that maximises the shareholders’ value. The companies with optimum debt-equity ratio, dividend payout ratio, retained earnings ratio, etc., hold higher potential for becoming multi-bagger stocks.
You may also analyse the reasons behind their capital allocation and assess whether it is prudent or not.
7. Growth potential
One hack that may help you find multi-bagger stocks is finding stocks with tremendous growth potential. After all, you are finding the multi-bagger stocks to earn amplified returns, which would happen when the stocks have high growth potential.
You may find possible multi-bagger stocks, which are undervalued now, though their financials and fundamentals suggest huge growth potential.
Real-World Examples Of Multibagger Stocks
Here are some real-world examples of multi-bagger stocks.
- Ruchi Soya Industries Limited
- Adani Transmission Limited
- Deepak Nitrite Limited
- Tata Elxsi Limited
- Brightcom Group Limited
- Dhanvarsha Finvest Limited
[Sources: https://tradebrains.in/top-5-multibagger-stocks-in-india-in-the-past-5-years/ ]
Things To Take Care Of While Choosing Multibagger Stocks
Having multi-bagger stocks in the portfolio is the dream of most investors. However, you better take care of the following mistakes while choosing them.
- You may receive stock buying tips and advice presenting some stocks as multi-baggers. Do not blindly follow them. Instead, conduct your research.
- Without enough research, you should try to avoid making bets on high price-to-earnings (P/E) stocks. You may get trapped in stocks that take long to offer expected returns.
Multi-bagger stocks offer you multiple times returns of your invested amount. There are plenty of ways that may help you spot those stocks, such as stocks of companies with a competitive advantage, healthy earnings growth, wise capital allocation, etc. However, conducting your research before investing in any stocks is always necessary.
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To invest in multi-bagger stocks, you may first identify the stocks of companies with strong and capable management, competitive advantage, healthy earnings growth, etc., and include them in your portfolio.
The future is uncertain; therefore, there is no guarantee on which stocks will be muti-bagger. However, you may find stocks having huge potential to be multi-bagger in the future, using criteria like competitive advantage, healthy earnings growth, future growth potential, etc.
You may perform technical analysis to find short-term multi-bagger stocks, i.e., stocks that can provide you returns several times, compared to the price you paid, in a few months. You may find technical indicators and strategies such as relative strength, comparative strength, multiple timeframe volume breakout, etc., helpful.
To find long-term multi-bagger stocks, you can analyse the companies fundamentally. Companies with strong and capable management, healthy promoter holding, competitive advantage, healthy earnings growth, high margin business, wise allocation of capital, and higher growth potential may be a perfect fit for your search.
There is no such term as ‘multi-bagger returns’. The stocks that can offer you a return several times compared to the price you paid to buy them are typically known as multi-bagger stocks.