Multibagger stocks meaning and why they are good investment options

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Source: REUTERS/Jayanta Shaw (INDIA)

Different types of investors take a dip in the stock markets every day. Some are traders, looking to be smarter than the market and aspiring to make profits out of short term trading. One such interesting investment zone is Multibagger stocks.

Multibagger Stocks are never frontline stocks, but stocks which are presently ruling low, but having future growth potential, either due to business cycle or management capability.

WHAT IS MULTIBAGGER STOCKS

Stocks that give returns that are several times their costs are called multibaggers. These are essentially stocks that are undervalued and have strong fundamentals, thus presenting themselves as great investment options. Multibagger stock companies are strong on corporate governance and have businesses that are scalable within a short span of time.

These Stocks are never frontline, but stocks which are currently ruling low, but having future growth potential, either due to business cycle or management capability. What makes a multi-bagger as multibagger is “time” and “continuous business growth”.

A stock that doubles its price is called two-bagger while if the price grows 12-times, it would be called a 12-bagger. Thus, multibaggers are stocks whose prices have risen multiple times their initial investment values.

Is it easy to buy into multi-baggers? If yes, then all of us should have been millionaire by now. Let’s try to address the issue.

How do you get multi-baggers? For this, we will need to understand why do stocks multiply and which type of stocks become multi-baggers?

There can be different approaches to this quest. We believe the most common formula for stocks becoming multi-baggers is to identify companies with underlying components.

  • First step to find multi-bagger stocks is understanding the basics of the market.
  • Multibaggers are mostly created from Small Cap stocks.
  • A business which can demonstrate high ROE/ROI for extended periods is available at attractive valuation due to negative business/promoter intent perception.
  • Debt level of the company should be within reasonable limits. There are no defined levels per se for debt, as it will vary from industry to industry.

Keep a check on the company’s revenue multiples on a quarter-on-quarter basis. If the multiples are low but the company is performing at the operational level, then that can be a hint that the company has significant upside potential.

You can not have 8 or 10 Stocks in portfolio and all will turn into Multibagger. Probability is 1 out 10 could be a potential multibagger.

Most important feature of sustainable multi-bagger stocks has been the ability to generate free cash flows consistently and the ability to grow them. Ex. IT, Pharma, Cement, Capital goods, consumer product companies which have demonstrated a steady increase in a free cash flow generation have become large cap stocks.

Calculate the trailing 12-month EPS and revenue to arrive at the current PE and price /sales ratios. If the PE level is growing faster than the stock price, then its chances of being a multibagger are bright.

Multibaggers demand high degree of patience.