The Quick March Of The Multibaggers

The Quick March Of The Multibaggers

Every investor aspires to have a multibagger in his or her portfolio. One or two such baggers in the portfolio with adequate weightage can lead to huge wealth creation. The problem lies in spotting the multibaggers in advance and betting on the top ones with sizeable capital. Ganesh Vaybase puts under the spotlight multibaggers of the year 2020 while also highlighting the trends in multibagger stocks over the past 10 years and the sectors that have produced the maximum 10 baggers in the past 10 ten years

The current market sentiment is extremely positive even as the DIIs have been selling since the start of the month while FIIs have been net buyers in this period. The global markets are flushed with liquidity and it is expected that the companies in US will deliver strong earnings’ growth this quarter. The IPO markets have also enthused investors by clocking above average listing gains in 2020. In fact, the year 2020 has surprised market participants in the way the markets have staged a V-shaped recovery with the stocks prices. Experts argue that the recovery on ground is not strong enough to justify recovery in stock prices; however, the recovery is definitely better than expected by most investors. 

This V-shaped recovery has pushed certain stock prices higher, turning them into multibaggers. Very few would have argued in favour of multibaggers in 2020 after considering the market crash in the first three months of the year. As many as 187 stocks managed to double in 2020 while a good number of 256 stocks delivered returns between 50-100 per cent. As many as 285 stocks cheered investors by generating returns anywhere between 25-50 per cent while 1,259 stocks have yielded positive returns on YTD basis.

These figures are important because in 2018-19 only 64 stocks managed to more than double in the given year while a miniscule 486 stocks managed to generate positive returns. It is worth noting that the Sensex generated positive returns in CY 2018 (7 per cent). On YTD basis, Sensex has not yet turned green in the current year. This goes to show the broader participation of the markets this year, which is keeping the investors happy and providing a chance for the markets to churn out a greater number of multibaggers.

Comments Amol Tope, an investor who believes in long-term investing: “The year 2020 has been a great year for me because I have as many as four multibaggers in my portfolio made up of a total of 16 stocks. I was somehow bullish on the pharmaceutical sector and was already holding Laurus Lab and Aarti Drugs from this sector alongside Titan Biotech from the chemical sector. The other multibagger in my portfolio is a little known name from the IT sector – Xelpmoc. While I am extremely pleased with the performance in terms of percentage gains of these multibaggers, I regret not having bought larger quantities of these stocks. The stocks where I have larger allocation have done well but the gains are nowhere near those recorded in these four stocks. Now I wonder which stocks may be multibaggers for the coming year.” 

Multibaggers of 2020

The year 2020 will go down as one of the most volatile and yet one of the most rewarding years in the history of Indian equity markets. The year was a special one not only because the stock prices miraculously recovered from the lows they touched in March 2020 but also because of the huge jump in retail participation in the markets this year. The month-on-month increase in number of dematerialisation accounts has given a new direction to the equity markets in India. To be fair, this trend of increasing retail investors’ participation has been a global trend.

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

-- Warren Buffett

Experts believe that a new wave of retail and inexperienced investors’ heightened participation is one of the reasons why the stock prices have jumped up so rapidly. With broader participation by investors and an increasing number of stocks turning positive on YTD basis, the momentum has remained fairly in the grip of bulls this year after the bears enjoyed dominance in the first three months of 2020. The positive momentum supported by ample liquidity and government stimulus worldwide churned out great number of multibaggers in 2020. Traditionally, the FMCG, IT and banking sector have been the dominant ones in India if we look at the performance of the past 10 years.

Rs 1 lac invested in Relaxo Footwear in 2012 would be worth more than Rs 68 lacs in 2020. This translates in CAGR of 69.51 per cent

 

"All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out."

-- Peter Lynch

Huge amount of wealth has been created by these three sectors in the past decade. However, 2020 was dominated by a sector that has been an underperformer in the past three to five years – healthcare. In fact, this sector emerged as a true wealth creator in 2020 with as many as 40 stocks from this space managing to more than double their respective share prices on YTD basis. Some of the healthcare sector stocks such as Laurus Lab, Aarti Drugs and Mangalum Drugs & Organics saw investors making a quick bid in their favour owing to extraordinary results in FY21.

Apart from the healthcare sector, finance and IT have been experiencing a good ride too. As many as 26 stocks from the finance sector and 17 stocks from the IT sector turned out to be multibaggers in 2020. The chemical sector once again proved to be profitable while churning out as many as 14 multibaggers on YTD basis in 2020. The trading and textile sectors were not far behind with 14 and 11 stocks, respectively, turning out be multibaggers this year.

Conclusion 

As is often said on D-Street, a 15-bagger with a 3 per cent allocation makes your career but a 15-bagger with 30 per cent allocation can make your life. As such, it is not enough for investors to simply identify the prospective multibagger. It is extremely important that the bet is backed by solid conviction, which is seen in the size of portfolio allocation. It is often seen that conviction in stocks is a derivative of research. More research brings in more insights and information. Greater insights and information provide investors an unbeatable advantage. Therefore, along with the bet, the size of the bet matters when it comes to maximisng the benefits from multibaggers. 

Investors have to get both the aspects right to create wealth from the so-called multibaggers. The current year has been great for risk-takers even as FPIs continued to show faith in Indian equities. The September quarter saw FPIs raise stakes in Indian mid-sized and small-cap companies. In fact, FPIs pushed up their stakes by over 100 basis points in at least a dozen companies from the broader market space. In the September quarter alone FPIs pumped in (net inflows) of Rs 46,860 crore as against Rs 29,517 crore in the June quarter. There has been a steady increase in FPI inflows since March 2020 when the market made its bottom for 2020. It is expected that the Indian markets will continue to receive funds from overseas in spite of the continuing spread of the pandemic globally. 

The global financial system is flush with liquidity and the depreciating USD augurs well for the prospects of emerging market equities such as India. Time and again the importance of sectoral performance evaluation has been highlighted in investment management literature. A top-down approach to investing warrants that one performs sectoral analysis thoroughly. If one were to perform a sectoral analysis it would not have been impossible to identify trends in IT and pharmaceutical stocks and to an extent in chemical stocks in 2020. The biggest advantage of identifying a secular trend in any sector is that it becomes easy to focus on tomorrow’s multibaggers. 

It is highly unlikely that an investor bets on an individual stock taking a bottom-up approach and it outperforms while the whole sector is reeling under pressures. Usually when a sector grows it carries along with it a fleet of stocks that can deliver phenomenal returns, thus churning out multibaggers in the process. As of now, the earnings’ visibility and growth lies with IT, pharmaceuticals, chemicals and FMCG. However, in the coming year the multibaggers could be from different sectors that have currently been underperforming, just as pharmaceuticals surprised us in 2020. Therefore, investors need to have an open mind while identifying multibaggers. The earnings’ growth and the quality of the same along with FPI participation will remain the key to the fortunes of the stock market. 

Investors can peruse deeper into micro-cap stocks with outstanding results to identify potential multibaggers for the coming quarters. Focus can be given to those micro-cap and small-cap counters where there is evidence of market share increasing along with improving profit margins. The real chances of finding future multibaggers lie in those companies with small market capitalisation. Hence, more emphasis on small-caps and micro-cap stocks is required if identifying multibaggers is the main goal with a realisation of higher risks involved in investing in unknown names. Even while identifying multibaggers it is essential that investors take a portfolio approach and bet on several focused stocks rather than betting on only one or two stocks.

 

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