Multibagger Stocks: Everything You Need to Know
New investors can be overwhelmed by the various investment choices they encounter as they begin their investment journey. However, what binds new and seasoned investors is their eye on investment strategies that continually generate returns- this is where the multibagger stocks come into the scene. Wise investors always choose multibagger stocks as one of their investment options for various reasons.
One of the reasons these stocks are so widely popular among investors is that they offer higher returns than the original amount invested as long as they continue their investment. In other words, multi-baggers can be a legitimate way to achieve high returns.
This blog aims to enlighten readers about multibagger stocks, their features, and related details that investors need to know before investing in multibagger stocks.
What Are Multibagger Stocks?
The term "multibagger stock" was coined by Peter Lynch. In his famous book "One up on Wallstreet" Lynch talked about these stocks that soon caught the attention of investors and traders. Multibagger stocks are generally those stocks that return several times their investment.
In short, the value of these stocks rises every once in a while as long as the investment continues. For example, if someone invests in a multibagger stock initially priced at INR 20, and the stock's price rises to INR 30, then the stock is called a two-bagger.
Again, if the price of the same stock increases by INR 40, then the stock is known as a three-bagger, and so on. In simpler terms, when the value of the stock rises, the profits also consequently increase, known as multibagger stocks.
How to Identify Multibagger Stocks?
Multibagger stocks are usually issued by small-cap and blue-size companies with exceptional growth potential and demonstrating robust management and production techniques. However, in certain cases, these stocks may reflect an economic bubble that may have adverse consequences on the economic makeup of a country in the long run.
Thus, investors should always invest in companies that financial experts have positively revered. The company should possess advanced research and development skills. There are several factors to consider when identifying multibagger stocks. Investors wondering how to find multibaggers stocks in India should benefit from the following hacks. Take a look-
Debt to Equity Ratio
The first recommendation when identifying multibagger stocks is that investors must research the company's debt-to-equity ratio beforehand. It should be noted that debt to equity ratio differs across industries. Nonetheless, investors should ensure that the company's debt-to-equity ratio should not exceed 0.3.
Price-To-Earnings (PE) Ratios
The PE ratio of a company is the ratio of its share value and earnings per share. Keeping an eye on the company's price-to-earnings ratio is important to identify multibaggers. A good indicator of a multibagger stock is when the PE is growing faster than the price of stocks.
Business Margin
Companies that have sustained high business margins without much fluctuation over a longer period (3-4 years) are the ones that are highly likely to generate multibaggers. If the company's margin tends to fluctuate every quarter of the year or yearly, then it is highly likely that these stocks will not rise to become multibaggers. Thus, investors should know that the company's high margins are directly associated with the efficiency of the company and its robust business framework.
Cheap Valuation of the Stock
When the stock is overvalued, investors may suffer from the burn of the drop in valuation. However, if the stock is undervalued, provided the company has robust fundamentals, the investors may benefit from investing in multibagger stocks.
Revenue Multiples
Revenue multiples of a company are the value of its equity compared to its revenues. Investors should refrain from investing in a company with a low revenue multiple.
Aim for an Industry That’s Growing Substantially
Picking up a multibagger in an industry with the potential for growth in the next ten years or so can be profitable for investors. If the industry has various financial hurdles, it is going to be way more complicated to pick a multibagger stock in such a company. Again, if the industry has a competitive advantage, they are more likely to draw profits in the long run. The company should show classical signs of growth, such as improved products and services per its customers' demands. Such industries and companies can be an ideal choice to pick multibaggers.
Exercise Patience
Multibaggers are vulnerable to changes in the market. Thus, investors aiming to benefit from investing in multibaggers need to be more patient in their investment strategy. Making a spot trade on multibaggers may offer lower returns. It is rather recommended to hold on to multibaggers in the long term and wisely cash out when the market is favorable.
Robust Management
Picking up multibaggers in a company that needs more management skills will not be ideal for investors aiming to gain higher returns. It should also be kept in mind that a good business runs on strong and capable management principles. When investing in a company's stocks, the investors must look at different factors associated with the company, such as its governance practices, the diversification of funds, pledging of shares, financial matters, board independence, etc. These factors determine whether the company's management is strong and capable.
Frequently Asked Questions (FAQs)
What is a multibagger stock?
Multibagger stocks are the stocks that offer returns several times once the investment is initiated. If the stock gives the investors two times the investment return, it is known as a two-bagger. Likewise, if the same stock gives investors thrice the return, it qualifies as a three-bagger, and so on. The term" "multibagger stock " was first used by Peter Lynch in his famous financial book "One up on Wallstreet."
Why should one invest in multibagger stocks?
Multibagger stocks offer high growth potential, and any investor looking to gain high returns with minimal risk should aim for multibaggers. Multiple live examples demonstrate how multibaggers have been highly profitable. For example, Uniply industries returned more than 14 baggers in a single year in 2015.
How to find multibagger stocks?
Finding multibagger stocks requires investors to display their investment skills. Investors should do a thorough examination of the company before they invest in their stocks. Some of the major factors to consider while finding multibagger stocks are the company's competitive advantage, PE ratio, management skills, promoter holding, earnings growth, business margin, and others.
Is investing in multibaggers profitable?
Yes, investing in multibagger stocks can offer high returns to investors because a multibagger stock provides returns that are more than the amount initially invested. These stocks are also minimally risked, which means that one can earn maximum profit with an assurance that they are likely to receive high returns in the long term.
Where can one buy multibagger stocks in India?
Ans. There are various multibagger stocks where investors can invest for multibagger stocks. Some popular ones are Swaraj India, Hawkins Cooker Ltd., Metropolis Healthcare, Gujurat Gas, etc. Even high-tech manufacturing companies with high presences in the IT segment can have high business margins as they were least affected during the COVID pandemic.