Multibagger stocks come across as the new buzzword in investment parlance.
You may be looking at creating long-term portfolios or concentrating on short-term gains, this works both ways.
Often for those who want to make a lot of profit in a hurry, the multibaggers offer huge options.
But the multibagger stocks often create confusion too.
It is very important to identify what’s hot and what’s not.
It is never wise to go by just one element of the definition.
There are many aspects of investing in stocks.
While it makes a sense to include them in your portfolio, making an informed choice is important.
Ultimately, that is what will ensure that you get superlative returns as expected.
Also, remember that a multibagger does not have to be a penny stock or a midcap always.
Going by hearsay is perhaps not the best way to deal with market investment.
Remember sometimes, people may also pass on their own fear and apprehension.
So, it becomes very important to make an informed choice in the market.
That is how you will be able to gain from multibagger stocks.
Definition of Multibagger Stocks
But before we move any further, it is important to understand what you mean by multibagger stocks.
The definition of multibaggers is how you can successfully distinguish these from other high return stocks.
You see the market is full of possibilities and potential.
The idea is to identify the most appropriate opportunity and cash in on it.
Most investment books will tell you that multibagger stocks deliver huge returns, sometimes even 100%.
But that is not all.
Most times, these are fundamentally very sound.
They have a strong business model and have been delivering great quality products consistently.
As a result, they become very dependable and attractive business to invest in.
Most importantly, these companies have strong corporate governance.
As a result, it is only a matter of time before the business starts yielding returns.
In most cases, the businesses can scale up really fast.
So, the investor needs to be sharp in terms of entering the stock at the right time and waiting for the appropriate levels for the prices to scale up.
The word multibagger is more of a derivation of existing market terminology.
Normally two-bagger is used for stocks that offer double the return.
When a stock price grows 10 times, it is called a 10 bagger.
So, a multibagger is a stock whose prices have increased several times the original investment.
In other words, these stocks have yielded returns multiple times, hence the term multibagger.
So primarily, this refers to any stock that holds the promise to yield phenomenal returns.
Therefore, a multibagger stock is any counter that yields a strong return on the basis of business fundamentals.
Remember the price rise is not due to any type of market volatility.
What Must You Know About Multibagger Stocks?
So now we are getting closer to identifying them, you have to take into account the key elements about multibagger stocks.
This will not just enhance your research but also add weight.
In many ways, if you knew these, identifying them also become simpler.
It creates depth in your overall stock study and makes your portfolio richer.
You already know some key elements like these have a dependable business model.
That means, it is relatively uncomplicated to research their business fundamentals.
In terms of growth possibilities, these are undeniable leaders.
But here are some features that help them stand out.
1. Sustainable Growth
The concept of continuous growth is never simple.
It is almost like a promise of non-stop growth irrespective of the growth factor.
So how they are able to transcend the time factor this easily is interesting.
The business model of the company is such that it is capable of delivering growth over a sustainable period.
Often it is this continuous growth that helps it become a multibagger.
2. Don’t Be in a Rush
If you are in a hurry to make money, this may not be the best option.
In fact, you need a lot of patience for investing in these type of stocks.
They do deliver multiple times return but it is inevitably over an extended period.
Often it may even take 4-8 years, in some cases, it is 10 years by the time they are multibaggers.
So if you lose patience in a year or so and book profit when they are up 60-70%, you can never get the 100% returns.
3. Don’t Limit to Midcaps
Typically the midcaps yields a much larger number of multibaggers.
But don’t end up ignoring the large-cap space either while looking for them.
Debt Level Is Crucial in Multibagger Stocks
Now the question then is how do you identify these multibagger stocks?
The pricing alone cannot be your tool to gauge these stocks.
The question then is how do you assess business fundamentals?
Debt is by far one of the best ways to gauge a business and its future prospects.
Think about how we analyze companies and their businesses?
Debt is by far the most important component of the business.
It tells you the kind of funds available and also indicates the extent of leverage.
Most importantly investors can also gauge the extent of risk that the company is exposed to.
So if you are assessing the health of a business, the debt level needs to be manageable.
Moreover, the source of repaying the debt is very important as well.
It will indicate if the business is able to generate the fund it requires.
In case it is borrowing from outside, it is important to know that source too.
The extent of scalability can be instantly gauged from the source of funding.
This will also help you analyze the quality of business and the level of commitment by the founders.
Often this is the most important distinguishing factor between a volatile penny stock and a multibagger stocks.
Debt level differs from business to business.
But, on an average, the debt should not be more than 30% of the net equity.
On an average, it may range between 15-20% of the equity depending on the industry.
Remember the cardinal factor for a multibagger is that it is undervalued.
So, in analyzing the debt of the company, it is important to ascertain that this does not increase the leverage disproportionately.
The key requirement for a good business is that the debt or liability is manageable.
Keep an Eye on Earnings Projection
Business fundamentals is the buzzword when you are considering multibagger stocks.
In this context, the next most important factor is that of earnings.
It is very important to assess the quarterly performance.
Remember we are currently operating in a rather uncertain economic situation.
Global economies are connected more than ever.
As the proverbial saying goes, you can catch a cold in New York even if someone sneezes in Japan.
Slowdown is a living reality in many economies the world over.
While there are some other economies that are moving ahead in leaps and bounds.
To add to that you have political unrest and other trade-related turmoil.
The idea is to choose stocks that are least impacted by all these uncertainties.
So it becomes important to gauge the earnings performance of the stocks you choose.
Depending on market condition, it is important to analyze how the earnings are impacted every quarter.
The quarterly analysis will help investors make a fair assessment of the degree of risk.
Moreover, it will help them understand if the stock in question is really undervalued or under-priced.
These have been mostly ignored by the market or may be mis-priced.
So a close study of the earnings will highlight if there is indeed need for any worry.
The basic premise, in this case, is that the business model is dependable.
The discrepancy in pricing is merely a matter of time.
So when you are choosing a stock, the one factor that can help you take a firm call is the earnings performance.
Well, that also does not mean that a stock will be performing very well continuously.
There can be occasional blips and phases of low returns.
Then again it becomes very important to gauge the time for turnaround too.
Don’t Forget a Qualitative Analysis of These Stocks
After you are done with analyzing the fundamentals and valuation of these, it is time for some qualitative analysis.
In fact, this is the test that often determines whether investing in a specific stock is justified.
More importantly, the qualitative analysis highlights the investment mettle of a counter.
In other words, it helps you decide how competent a specific stock is.
So you have to get down to check the quality of the company or the business.
This includes a close study of the management and the competition around it.
Often these factors contribute to its sustenance to a large extent.
It helps you decide how easily scalable is the business model.
The earnings estimate may project x% growth.
But the qualitative analysis will help you decide how quickly or how effectively can you experience it.
The competitive advantage that a stock has is a very important factor.
Often that is the key element that most investors miss out on.
But when you are considering multibaggers, this is the factor that is abetting continuous growth.
Moreover, you have to gauge this competitive advantage over the longer term as well as the short-term.
That is how you can decide how long-lasting will be the benefits that you are anticipating.
It will also rationalize the debt exposure in certain cases.
Especially, if a company has undertaken debt for expansion, the competitive advantage can help justify the higher leverage.
It is often the core element that contributes towards profitability and revenue generation.
That you will agree leads to ultimate profitability.
The core concern is to identify a stock that is undervalued but promises value.
An in-depth qualitative analysis will help you identify exactly this factor.
It is often the backbone of a meaningful research.
What Are You Opting for When You Invest in Multibagger Stocks?
So, that brings us to some of the known traits about multibagger stocks.
You are surely using some well-established parameters to gauge them.
But here is a closer look at how effectively you need to redirect these parameters.
1. Bargain Hunting in Stock Market
Most times when investors are choosing these, they are getting growth at a discounted level.
Most times, they are buying these multibagger stocks at a discounted rate.
You are selecting a reasonably priced stock.
But what you are getting in return is a phenomenal profit margin.
So you are paying a reasonable cost for a growth that is unreasonably high.
It, therefore, becomes like one of the most touted clearance sales.
A great dress is lying under a heap of mediocre options.
Quite needless to mention, you are exhilarated by the prospects.
But you have to keep your patience and wait for the ultimate gains.
2. Turn-Around Stories
By choosing these bargain entities, you are also betting on some badly beaten counters on the street.
So you are in many ways going for resilient companies.
That means, these companies have a far better scope and opportunity in terms of sustainable growth.
They are able to create a meaningful growth trajectory.
It means that these companies have the strength and strategy to recoup losses.
That, in many ways, puts you in the winning league instantly.
The experience that these companies have instantly puts you on the hot seat in terms of dependable growth options.
3. Competitive Advantage
You also end up getting a huge competitive advantage in terms of sectoral allocation.
The multibagger stocks are inevitably the ones that have successfully dealt with competition.
Both in terms of positioning and also strategy for future, they come across as industry leaders.
Advantages of Investing in Multibagger Stocks
So, there are some distinct advantages of buying multibagger stocks.
You are easily able to crank up the average portfolio value significantly.
But that apart, there are many other advantages as well.
1. Significant Return on Equity
Normally the return on equity is in many ways your percentage of profit from an investment.
Inevitably, the multibagger stocks are associated with superlative returns.
It rewards its investors with an above average profitability margin.
So by investing in these type of stocks, you are easily catching up on the growth bandwagon rather easily.
2. Getting an Opportunity Advantage
Many in the street term multibagger stocks as taking advantage of missed opportunities.
As a result, you get the benefit of buying these at a discount.
You are able to bet on a superlative growth by taking advantage of something that the market ignored.
The stock may be underpriced just because the sector is out of favor
By getting an opportunity to buy at a lower price, you peg your bets on a dependable growth engine.
3. Change Makers
Multibagger stocks are turnaround stories only because they are able to successfully wade through failures.
Normally the higher growth is purely a function of some structural change in business.
Either the way the company conducted its business or the management that created trouble is tackled effectively.
As a result, you are able to get a superior growth story without really compromising on the price levels.
The price of the stock languished as the street underestimated the company’s sustainability.
By making some bold changes, the company did not just guarantee superior growth.
Also, it brought forth a dependable portfolio buzzer.
It made it possible for investors to get one unique growth story that instantly changed the construct of their portfolio.
It is about embracing change.
Therefore, it goes without saying that if you want a strong portfolio you must bet on multibagger stocks.
However, don’t be in a rush to invest in these types of stocks.
The market is full of low priced stocks.
But not all of them are multibaggers.
The trick is to make an informed choice at every juncture.
Often the idea is to grab a great growth story at a distinct discount.
This is primarily the essence of multibagger stocks.
It holds out the promise of a phenomenal return without investing too much.
But you have to choose wisely from a whole list of potential multibagger stocks.
That is how you can book maximum profit.