Every investor wants to have a multibagger company in their portfolio. We invest in companies, assuming one will give us multibagger returns. Investors also come across group forwards that creates a FOMO – If you had invested Rs 1,00,000 in ABC Ltd in 2017, your capital would have turned Rs 25,00,000.
Clearing the misconception around multibagger stocks
Before we get into multibagger in detail, we would like you to understand the above message. If you are also fascinated by these messages and running after multibagger stocks, you need to know below two points:
- Multibagger companies are hard to find. Among the thousands of listed companies in India, only a handful gives exceptional returns in a short span. The probability of finding one such company is less than 1%. Even the industry experts don’t always get it right.
- When you hear of 1000% returns, you wish to be one of the investors who had invested in the company. Look at it this way – the 1000% return is calculated from the share’s lowest point to the highest share price. To make such returns, you should have invested on the bottom and continued to stay invested. How many investors do you think would have done this? Perhaps a handful and in some cases – none.
What are multibagger stocks with examples?
As mentioned above, it is not easy to find multibagger stocks. However, some companies have created exceptional wealth for investors. A multibagger company is one in which multiple investors’ wealth (10X or more) in a short span.
However, the short time does not mean one or two years – if stock is giving 10X returns in such a short time, there must be some speculation around it. From a business perspective, a short time means eight to ten years. A business takes years to establish itself and then to grow much longer.
Some fundamentally strong stocks with multibagger returns are Asian Paints, HDFC Bank, Eicher Motors, Bajaj Finance, etc. Before you start to look for multibagger companies, your first step should be to study the above stocks. How did they start, and what factors made them the companies they are today?
Factors to consider
To help you in your journey of finding a multibagger stock, we are listing down some points that are must for the company to become a multibagger:
Strong management – If the company’s management is not good, there is no question that it will grow. The leadership team should be capable and strong. Also, it should not change frequently. You can check the individual leaders, governance practices, pledging of shares, etc. If everything looks good, you can move to the next point.
Promoter Holding – Here is a question for all the readers. If you are running a company, you will know everything about it. You will have a decent idea of future growth. Also, how far you can take the company. If you are 100% sure about the growth, would you sell even a single share you hold in the company? No, you will not. So, you should see the promoters’ holding in the company. It should not decline. If it increases, the better.
Earning growth – You need to evaluate the company by looking at its profit. You will have to put in efforts to study the profitability and growth model of the company. One of the parameters you can check is Earning Per Share (EPS). It tells you how much the company is earning against each share. A potential multibagger is one in which the EPS is continuously increasing.
Look for high margin business – Margin tells you how much profit the company makes for every hundred rupees it makes in sales. Let us assume there are two companies, and both of them are doing business (revenue) of Rs 100 crore in a quarter. Considering other business expenses, the profit margin of company A comes to be 20%, while company B’s profit margin is 35%. Which company will grow fast? Company B has a higher growth probability since it makes more profit for every rupee earned. Profits can be used by the company to expand business or make acquisitions. Multibagger companies have sustained margins over time, and they don’t fluctuate every quarter.
A word of caution
Let us assume you find a multibagger stock and invest in it. The share price starts to increase. Since you are 100% that this is a multibagger stock, you may tend to allocate more money to it in greed. You may divert the investment you were making in other companies or mutual funds to just one stock.
Investors should never do that – asset allocation is essential with diversification. Even if you are certain it is a multibagger stock, it should consist of only a percent of your total portfolio. Your equity portfolio should never be driven by one single investment.
Conclusion
Based on the above information, you must be thinking – finding a multibagger is a lot of effort. You are right on this point. It is not everyone’s cup of tea – you need expertise, dedication, and patience.
If you are betting on multibagger stock based on a friend’s recommendation, then you are gambling with your money. If you do not understand the market, it is best you take professional help. Even if you do, having professional advice in money matters reduces your risk.You can check Jarvis Invest and start your investment journey. Jarvis Invest, over the years, has given returns to investors higher than the benchmark. You should see yourself by downloading the app – how technology is changing the investing for thousands of investors.