What are Multibagger Stocks?

A stock that gives is what every investor wants. If you're lucky enough to spot one, a multibagger stock can be exactly what you want.

What is a Multibagger Stock?

Peter Lynch first used the term "Multibagger" stocks in his book " One up on Wallstreet". Multibagger stocks are stocks that provide multiple times their investment. This means that they can return 100 percent more or less in a short period of time. If a stock offers twice as much return, it is a 2-bagger. However, if it offers three times or more, it becomes a 3-bagger. These stocks have great fundamentals and high potential for growth, but they are still undervalued.

Multibaggers are a great way to invest capital that is risk-averse. The catch is that a multibagger can only be seen in hindsight. It may seem like a risky venture in an overstimulated market.

Examples of Multibaggers

Uniply Industries, which returned over 1400%, fourteen-bagger in one year, is an example of a multibagger in India. In 2020, some of the most popular multibaggers on Indian stock markets were Uniply Industries which returned more than 1400 percent in a single year; La Opala RG which rose 4500 percent over the decade before; and Garware Technical Fibres which has returned 2600% in the past ten years.

Multibaggers should be viewed with caution by investors. Multiple factors could be responsible for stellar performance, such as high growth potential and base effect. Multibaggers' past performance cannot be guaranteed to produce similar results in the future.

How do you identify multibagger stocks.

1. Bookkeeping debt

Investors should be aware of the company's ratio of debt to equity. Overleveraged companies could face operational risks later. Experts suggest that the debt to equity ratio should not exceed 0. Look out for companies that consistently return capital. The company that grows purely on capital infusion without innovation or ROC increases is at risk of becoming a default risk.

2. Take a look at multiple revenue streams

The company's revenue multiplier is the ratio of the equity to its revenues. A company with a low revenue multiple is considered a bargain. This may be a sign that a company is strong on its fundamentals and has potential for growth.

3. Examine the PE ratios

If you examine the current price to equity ratio of a company, you will be able to identify a multibagger. The company's current price to earnings ratio, which is the ratio between its share price (and earnings per share), is what it costs. A multibagger will have a PE that is higher than its stock price.

4. Stocks that are undervalued

Low valuations are not always a bad thing. Investors may be disappointed if a stock is too valued. If a stock is overvalued and the company has strong fundamentals, it could be revised in the future and investors may benefit from it.

5. Pick a strong industry

A multibagger should be chosen in an industry that is expected to grow significantly in the next five to ten year. It may be more difficult to choose a multibagger if the industry shows signs of slowing down or has high economic or policy hurdles.

6. You should look for a company that has a strong competitive edge

A company that has an 'economic moat', or a competitive advantage that is maintained by a company in order to continue drawing in long-term profits, is one to look for. The company's economic moat can boost its growth and profitability over its competition. This could include a significant market share, low production costs, scalability and strong brand leadership.

7. Be patient

Multibaggers can be a great asset for investors. Investors must have patience. Spot trading on multibaggers, no matter how reasonable, won't be of any benefit to you and may not even provide higher returns. You might be able to keep the winners over the long-term, which may be a smart idea.

8. Management is the key

Take a look at the leadership of the company and their management practices. Also, consider stability, vision for company, shareholder and dividend policies, corporate governance, and stability. You should look for experienced management who can successfully navigate economic downturns or other business crises. Investors should be wary of companies that change their business model too often.

Conclusion

Multibaggers may increase your portfolio's overall returns, but technical trend analysis and research to pick a winner will yield better results.