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What Are Multibagger Stocks- A Comprehensive Guide

The term Multibagger first came into existence in 1988. It was coined by the brilliant Peter Lynch- in his best-selling book, One Up On Wall Street. The idea behind this term was borrowed from the game of baseball. In this game, the number of bases or bags the runner attains will affect the success of the game. Lynch tried to relate this concept in the stock market by naming certain stocks as Multibaggers. It means that these unique stocks are equity shares of a firm that generates returns several times higher than the original acquisition cost in a short span.

For example, A ten-bagger is a stock that gives returns ten times more than the investment made.

Multibagger stocks are only issued by businesses- who possess enormous fortieth potential, highly efficient production techniques, and reliable management. All of these factors reflect on the development skills and research of the company, which enables their company to generate sales through the roof. Some scholars even call it a unicorn of the stock market because of how idealistic the concept is.

 

In-Depth Understanding of Multibagger stocks

Multibagger stocks describe the characteristic feature of the shares and do not refer to a separate category of shares. These shares have a significantly high potential to grow and earn profits for the firm compared to other shares. Most often, these stocks are undervalued and flourish in emerging markets like India. There is a set of criteria that determines what stocks have the potential to become multibagger and what stocks do not.

Keep in mind that multibagger stocks take a considerably long time to show high values. Therefore, the investor needs to be patient. Firms competing in emerging markets can harness their unique indigenous advantages to enhance the growth of the shares.

How To Recognise Multibagger Stocks 

Below mentioned are 5 indicators that will help you identify multibagger stocks in the market.

1. History of performances - All professionals analyse the past performance of a company to predict its future trends. It gives us reliable information on how the firm may or may not perform in the current and future market. Track the business’s revenue multiples each quarter. If the revenues are less, but the firm is performing relatively well in the market, then it suggests that the firm has tremendous growth potential.

2. Debt to equity ratio - Every company has debts. There is no benchmark to determine what should be the appropriate debt level because the conditions vary from company to company and industry to industry. The approximate measure is that the debt to equity ratio should not be more than 30%. It means that the amount of debt should be less than 30% of the equity value. 

3. Company policies - They are the backbone of every firm. Company policies dictate how it will carry out mundane operations, the functioning of management, and so on. Research the company’s business model and policies to learn more about the staff, management, etc. It is vital because any primary changes in policies, the management, or the business model will alter quarterly results and annual financial reports. Thus, it will ultimately impact the stock value and growth. 

4. PE - To derive PE, you need to calculate the EPS of the last 12 months and revenue. Along with PE, it will also give you the sales ratio. If the PE level is rapidly growing compared to stock price, then the probability of it being a multibagger stock in the future is significantly high.

5. Sources of revenue - Checking the revenue numbers isn’t enough. You should also do a background check to confirm where the revenue is being generated. The sources of earnings answer two crucial questions. They are-

  • Will the primary revenue sector grow at the macro level?
  • Are the operations of the firm scalable?

If your answer to both the questions is yes, then the stock has a fair chance of becoming a multibagger stock. 

 Are Multibagger Stocks The Right Investment For You?

To simply put it- multibagger stocks are the ideal investment for any individual or firm. The increased returns on these stocks will 100% enhance your financial status. No other stock will give you such high returns in a short duration. However, to ensure that you compound your returns with several manifolds, you will need to keep the multibagger stock for a set minimum duration. It will help you gain extensive profits through- the turnover of funds to the ultimate product sold in the marketplace. 

To conclude

In India, Multibagger stocks have to be bought in bulk for the creation of wealth. Nonetheless, this may not be the case around the globe. Investors need to perform personal research and analyse the financial backgrounds of companies/trends in the stock market to make informed investments in multibagger stocks.