Multibagger Stocks: Definition, Characteristics and Method To Find Multibagger Stocks

  

What are Multibagger Stocks?

Multibagger stocks are equity shares of a company which generate returns multiple times higher than its associated cost of acquisition. These stocks were first invented by Peter Lynch, published in his book ‘One Up on Wall Street’.

These shares are issued by companies having tremendous growth potential, demonstrating sound management and production techniques. It also exhibits excellent research and development skills of a company, allowing this product to generate high demand in the market.

However, in some instances, stocks might reflect an economic bubble developing in a country as well, which might have adverse repercussions in the financial market of a country in the long term.

What Characteristics Should a Company Possess to Generate Multibagger Shares?

These stocks  are associated with manifold returns on investments. Such profits can only be realised if companies possess certain characteristics, such as:

• Advanced research and development skills 

Robust growth of a company is associated with a massive volume of sales of its product in the market. To achieve this, quality products have to be delivered by such companies, providing immense customer satisfaction. Considerable investment in research and development of a product has to be undertaken by companies to enlist its securities in the stock exchange as stocks.

Start-up companies launching products having tremendous customer usage scope and no close substitutes are likely to generate massive demand in the market. These companies can increase their paid-up capital by issuing stocks. 

Companies acting as a monopoly or duopoly in the market can also be classified as issuer of shares. Aggressive pricing strategies along with entry restrictions, can help companies increase their total revenue generation.

• High growth 

You can easily identify Multibagger stocks by looking at the performance of an issuing company. Businesses demonstrating high-profit generation and limited debt liability are top contenders. These shares have high earnings per share as well, increasing your dividend income on the investment amount. These companies tend to have a low debt to equity ratio, indicating strong financial management skills. Price to earnings growth ratio (PEG) is also high, as the returns on one unit value of a share is several times of the primary investment.

• Excellent Management Skills

These stocks are issued by companies having trained and experienced managers. With inefficient management, proper flow is not likely to be maintained in the production chain, as coordination between production and sales chain would be faulty. Several analysts are also employed by such companies to identify optimal pricing level, to ensure revenue maximisation.

Why Should You Invest In Multibagger Stocks?

These stocks are known to increase your wealth manifold, as the returns on such investments are tremendous. For example, you can invest in such shares for Rs. 100, and realise profits amounting to Rs. 1000 (ten times the original amount – tenbagger stock).

However, investment in these shares has to be kept in for a minimum amount of time, to ensure extensive capital gains through turnover of funds to final products sold in the market. Funds obtained from listing shares in stock exchange are used for both research and development and production of a product, thereby effectively realising high profits through massive sales volume.

What Is The Risk Associated With Multibagger Shares?

Multibagger stocks in India have to be purchased in bulk for wealth creation of an individual. Therefore loss incurred by an individual would also be substantial in case he/she is caught in a market downturn.

Many investors purchasing these shares can get caught up in an economic bubble or value trap. Companies trading at high prices might reflect the creation of an asset bubble in the country, wherein the product being manufactured is in high demand due to underlying market conditions. This would lead to massive losses incurred by an individual when the bubble pops and the asset value spirals.

Similarly, value traps are a rising possibility when it comes to these stocks. Products manufactured by a company might seem like a profitable investment option in the present but would lead to losses in the long term. Investors expect the prices of such shares to rise tremendously in the future. However, this situation does not arise, as the asset does not have any intrinsic value.

Thus, investors need to carefully analyse the financial statements of a company and the prevailing situation in stock markets before investing in these stocks.

How to find multibagger stocks ??

Step 1: Potential Valuation Outliers

The ‘Multibagger’ team of research analysts uses a number of proprietary screening tools to shortlist stocks (among the largest universe of companies) that meet the parameters of having the highest possibility of becoming multibaggers.

Step 2: Fundamental research

The StockAxis ‘Multibagger’ research team then undertakes rigorous fundamental analysis of the shortlisted potential multibaggers. These potential valuation outliers must meet parameters such as earnings growth, profitability parameters, management experience and competence, return on equity benchmarks, competition analysis, etc.

Step 3: Business & Industry Research

The industry, which the company is a part of, should have tailwinds; the company should work on favourable business economics, be a leader in its segment and have niche products. These parameters support a good management to sail through rough business times. We consider all these parameters in our assessment of each company.

Step 4: Stock monitoring and review

Stocks that meet Stock Multibagger criteria are recommended.These stocks are actively monitored till the positions are open.

Extra Knowledge: Stocks For Long Investments

Credit: Groww- Multibagger Stocks , Stockaxis

Disclaimer: Take your decisions after doing your own analysis.