How to identify multibagger stocks?
“Make Rs 2 crore with just Rs 15,000!” It’s crazy, isn’t it? All of us have come across such lucrative pieces on the internet and are probably guilty of clicking on them. More often than not, these turn out to be “get-rich-quick” Ponzi schemes that all of us have been warned about by an uncountable number of people. However, what if I tell you, there are legitimate ways of achieving this! You can amass wealth via stock market investing, with the help of what we call ‘multibagger stocks’, which I would be explaining further in this article.
A multi-bagger is a stock that provides returns that are several times the amount invested in it. For example, if you purchase a stock at a market price of Rs 20 and it climbs to Rs 500 in a relatively short time, then it is called a multi-bagger stock. It fetches investors, an unimaginable return in a very short duration. These businesses tend to have unique characteristics such as a strong financial performance, reliable & capable management, efficient capital allocation strategy, and robust free cash flows, etc but more importantly, they remain undiscovered in the universe of stocks.
How to identify them?
1) Strong and capable management: A business cannot succeed without a management team that is capable as well as strong. Looking 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, etc. will help you determine the strength of the management team.
2) Competitive advantage: It’s perhaps one of the best ways to identify multibagger stocks. A company can stay in the competition by offering better services & products as it grows. For this, it is necessary that the products are unique and better than its competitors.
3) High margin business and healthy profitability growth: Look for businesses, which enjoy higher profitability margins as well as higher entry barriers. Apart from this, one should also check the financial track record of the company to check if it’s growing at a faster pace than the industry.
4) Future growth potential: One should have a sound knowledge of the products that the company is manufacturing along with its demand, going further, as well as the economic aspects of the industry and the country as a whole. An investor should invest in a stock, which has high growth prospects.
5) Remain patient: The stock market is a game of patience; never lose it! A multi-bagger stock sometimes may take some time to take off. Be confident in your idea & research, and let time do the rest for you.
You must have heard about how behemoths like Eicher Motors, MRF Ltd, Astral Poly Technik, Vinat Organics, LA Opala RG, Garware Technical Fibres, etc. have achieved phenomenal growth over the past few years. All these stocks have given significant returns over the years, and hence, still make it to the list of multibagger stocks for 2020. Had you invested Rs 10,000 in these stocks in 2010, you would have made lakhs today!