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How To Select a Multi Bagger Stock?

By News Canvass | Dec 02, 2021

Multibaggers, as the name implies, are stocks that have the potential to achieve triple-digit gains. These are usually equities with a lot of potential for growth. They may not provide dramatic returns at first, but they have the potential to be a major mover in the long run. Identifying future midcaps/large caps stocks from today’s small caps stocks is the technique of spotting multi-baggers. They are equities that develop over time and do not provide quick rewards when purchased. Over time, a fundamentally sound small cap firm with competent management and a long-term strategy will develop into a multi-bagger.

Here Are Some Traits To Look For While Looking For Identifying Multibagger Stocks

1) Take a look at what the industry has to offer. The first and most important thing you need to know is not about the stock, but about the industry to which it belongs. Recognize forthcoming trends and which industries will profit the most from them.

2) Company’s Advantage in the Market This is one of the most effective methods for spotting multibagger stocks in India. As a business grows, it may stay competitive by providing better services and goods. Look at how inventive a company has been to assess if it has a competitive advantage. You may do so by looking at how many patents they have, how active their R&D department is, and how often they release new goods and services.

3) Examine debt levels. The debt ratio refers to how much of an organization’s total capital is used for its operations. A ratio of 0.5 or lower indicates that the company’s capital structure has less debt. The more debt a corporation has, the more likely its cash flow would be unpredictable. The potential for expansion is demonstrated by a positive and free-flowing cash flow.

4) Healthy earnings growth When a corporation makes money, a shareholder benefits. When you examine the results of a multibagger stock, you will notice that the company’s earnings have grown rapidly due to its revenue growth model, profitability model, and capital allocation plan. To calculate the earnings per share (EPS)

EPS= Net Profit/ Number of outstanding shares

The EPS is a measure of a company’s earnings per share. A multi-EPS bagger should be heading north.

5) Financially conservative strategy or prudent capital allocation Multi-billion-dollar corporations frequently employ internal capital to expand or launch new goods. In addition, these businesses have a lower debt-to-equity ratio. These businesses are known for their ability to produce free cash flow (which is computed as cash flow from operations minus purchase of fixed assets). This cash flow will be utilised to pay dividends or fund future expansions.

6) Businesses with a High Margin Another simple way to figure out how to spot multibagger stocks is to hunt for companies with large profit margins. Multibaggers usually have high profit margins due to a lack of competition or because they have a dominant position in the sector. Furthermore, these stocks have a long-term margin that does not fluctuate every quarter or year.

7) Management of the company and promoter holding: A potential multi-bagger company must have solid management with a vision for growth and integrity. A sign of a trusted company comes from its strong leadership. Also, look for a promoter holding. It is the percentage of shares that the promoters hold in the company; when there is a high promoter holding it reflects the confidence they place in the company’s growth. So, shortlist companies where promoter holding is high as one of the factors to help you pick the right multi-bagger.

Potential Risks
  • It requires large purchases, putting the investor at risk if the stock falls in value. People who invest in penny stocks believe that the bigger the risk, the greater the gain. However, if the stock begins to fall, it might quickly turn into a curse.
  • Because of the strong transitory demand for the underlying product/service, many people invest in a value trap or an economic bubble. Bulk investors frequently cause it by creating a false bull setup and then pulling the trigger by short-selling.
  • The investment is secured for a long period of time. Most multibaggers take more than two decades to bloom, so you’ll have to hold off on selling them in the future years. You will also have capital blocking as a result of this.
  • Trick trades, or false inflation induced by others investing in it, are a risk. The majority of these are small-cap equities with minimal market capitalization, making them vulnerable to manipulation.
  • In its early days, these stocks had minimal liquidity and poor performance. It means that any rumour that circulates around them has the potential to cause a price drop. It can take months for such stocks to recover.

If you recognise the fundamental qualities, you can quickly learn how to find multibagger stocks in India. It’s also worth noting that these equities should be purchased with a long-term investment horizon in mind. Patience is one of the most important traits to possess if you want to gain from a multibagger. These firms have endured the test of time and have taken years to establish themselves as leaders in their respective areas.Your perseverance will eventually pay off, and you’ll be able to profit from the multi-baggers’ success.

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