Multibagger Stocks For All Seasons

Patience, Long Term Horizon Is Key

Identifying multibagger stocks is an adventurous exercise and not everybody’s cup of tea. An investor who is able to identify specific characteristics of a multibagger stock and has strong conviction about the stock has a good chance to generate astronomical returns on investments. Yogesh Supekar finds out which sectors generated maximum multibaggers in the past decade and more while Vinayak Gangule presents the checklist for identifying multibaggers.



Investors are always hunting for multibaggers irrespective of the market conditions. It is futile to look at companies from benchmark indices (Sensex, Nifty) while hunting for multibaggers. One needs to look at smaller stocks having high growth potential from broader market indices as they offer lower base and are usually operating in high growth sectors.

It is common to see large number of stocks getting the ‘multibaggers’ tag in a bullish market environment. But chances of identifying stocks that can multiply money gets reduced drastically in a challenging market environment.

If investors keep an investment horizon of atleast a decade and more then tough market conditions such these days, wherein broader markets are underperforming, are best time to hunt for multibaggers. In simple terms, more multibagger opportunities can be found in the down market than in normal market condition.

The below table highlights number of stocks that generated more than 100 per cent returns with in a year in the past 10 years.



The above table shows that the number of stocks more than doubling increased sharply after a poor market condition in 2011 and again in 2013. It happened in even in 2017 after two flattish years of 2015 and 2016.

Year 2018 and 2019 have been an exception and tough for broader markets. Several stocks are down by more than 50 per cent from their respective 52-week highs. In the small cap space, almost 125 stocks were down by more than 50 per cent in 2018. In 2019 by October end we have 109 stocks in the small cap space that are trading below 50 per cent from their respective 52 week highs. 

A closer look at the small cap stocks performance in 2011 and 2013 makes this observation even more clear.



The above table shows that 191 stocks tanked more than 50 per cent but 91 of them turned out to be multibaggers in mere three years while an impressive 150 stocks became multibaggers in five years time frame. This goes to suggest that nearly 47 per cent of the stocks that underperformed in 2011 turned out to be multibaggers in three years time while close to 78 per cent that were down by more than 50 per cent turned out to be multibaggers in five-year time.

Sectors that have consistently produced multibaggers

When we look at 10 and 20 year data, we find that maximum number of multibaggers have come from chemical , healthcare, auto and auto ancilliaries, capital goods and FMCG sectors. These sector have consistently shown above average growth and have consistently reflected higher profit margins.



The data in the above table highlights that there are 29 multibaggers coming from chemical sector and on an average annualised return has been 47 per cent for past 10 years. We have 15 healthcare stocks averaging 40 per cent annualised return followed by 14 stocks from automobiles and ancillaries sector averaging 35 per cent annualised returns. There are 10 multibagger stocks each from capital good, Finance and FMCG sector that have delivered 33 , 30 and 42 per cent annualised returns respectively.

If we extend our observation to the performance of stocks from various sectors, over past 20 years we find that companies from same sectors have produced maximum multibaggers.




Multibaggers of 2019

Very few stocks have managed to generate more than 100 per cent return in 2019 on YTD basis. We can see that only 26 stocks have manage to generate more than 100 per cent returns on YTD basis. Out of 26 such stocks, six are from financial services sector.



Most investors are not able to book astronomical returns because they are not willing to wait long enough 

Multibagger portfolio

When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever. 

- Warren Buffett 

Mostly multibagger investing involves investing in micro cap companies. These are undiscovered/lesser known stocks and the institutional holding is non-existent or minimal in initial years. Such micro cap companies are usually not well researched and lack important information/disclosures required for investment decision making. They can be illiquid and hence risky. Thus, they end up being speculative bets.

But they can offer tremendous growth potential if proper research is done.

Investor are better off spreading the portfolio amount across several micro cap stocks having growth potential. An equal weightage portfolio of let’s say ten stocks can be constructed. It is quite possible that few of these ten stocks may come down to zero while few may remain flat and one or two stocks may outperform the markets by some margin. But even if two-three stocks multiply three-five times, one can make money. Here it is very important to diversify.

It is also important that all the ten micro cap or small cap potential multibagger stocks have good fundamentals.

Usually, it is seen that most of the multibaggers reflect long period sideways movement before the institutional investors start taking interest in these stocks. So, it is important to study the long-term trend of the underlying stocks technically as well.

Also, most of the multibaggers after a long period of sideways movement reflect a very strong resistance breakout on high volume. This breakout can push the stock price high very fast thus making it attractive for momentum investors and traders which further pushes the stock prices higher.

Once the portfolio is constructed, investors should show patience and conviction which is key element of successful investing.

Many times, quarterly results may not be up to the mark for the stocks. There could be degrowth and investors may be get tempted to sell the holdings. The only thing that need to consider is whether the poor results are an aberration, or the fundamentals are going to improve We provide you the checklist below: 

Multibagger checklist 

 Micro caps, small caps , low liquid scrips with low institutional holdings
 High growth company in high growth industry
 Company should possess some core competence or core advantage
 Quality management
 Aggressive future growth strategy
 Scalability along with higher return ratios
 Low debt or preferably no debt 

Finding multibagger stocks is not a game of blind speculation. With proper techniques and focus on stocks with specific characteristics, probability of identifying a multibagger improves. 

Conclusion

There is no harm in aiming for multibagger stocks and expecting astronomical returns. Focus on quality is of utmost importance while identifying multibaggers. No money can be made in the long run if quality is compromised. Usually, it is relatively easy to find multibaggers in the sector that enjoys high CAGR profit growth and margins.
 
Also investors need to have patience and determination to remain invested for the long term, which very few have. Investors usually keep an investment horizon of 1-7 years at the most. Patience and conviction is the key when it comes to multiplying your capital in a systematic manner.

Looking at the current market situation, opportunities exist to identify multibagger stocks as several stocks have been beaten down in past two years. One should opt for businesses with strong balance sheets, ethical business practices and sound future growth strategy.