Ever wondered how to identify multibagger stocks? Let us help you.
The trading game is the biggest growing trend of today’s time and age. Anyone looking for ways and means to grow their money without putting in much effort is realizing the power of the stock market.
The motivation these people get is from the various success stories of the stock market where a few lucky or skilled investors managed to double their money over a period of a few weeks.
That leaves everyone wondering what is the key behind the success of such men. The answer is that such stories are either myths or based on the pure luck of certain investors.
Does that mean there is no way to multiply your money? Well, there is!
With adequate time and multibagger stocks, you can surely earn profits multiple times your investments.
What are Multibagger Stocks?
Multibagger stocks are stocks that provide returns which are multiple times the initial investment in the stock.
In simple terms, if let us say you invested ₹1000 into stock and within a short period of time it returned an amount of, say, ₹10,000, then the stock will be identified as a multibagger stock.
Multibagger stocks could belong to any company depending on its valuation.
A few well-known multibagger stocks are L&T, Sun Pharma, Titan, Wipro, and many more. It is worth noting that no stock becomes a multi-bagger in a single day. It’s a process of months, or sometimes, even years.
Stocks that hold the potential to become multibaggers do so by putting in months or even years of hard work, even after their value is recognized by investors. Without their efforts, they would have had no chance of becoming multibagger stocks.
What to look for?
Now that we have an idea of what multibagger stocks are, it is time to learn how to recognize multibagger stocks in the midst of an army of stocks at your disposal. Because the earlier you find one, the more benefit you can gain.
An advantage in the market
When we speak of an advantage, we mean a reason for a company to perform better than its competitors.
The advantage can be something like a greater zeal to understand the need of the consumer and deliver a better product to them. Or finding what will be the need of tomorrow and developing the technology to fulfil that need.
Finding the company will require lots of research including looking at past records and the results that have been produced by their RnD department. The advantage in the market usually goes to those who are willing to innovate and experiment to find something new.
A good company can only function under the guidance of a competent management team. The management is responsible for all of the major decisions affecting the company.
Their understanding of the company’s future and current assets will be a game-changer in bringing out the full capabilities of the company.
Apart from that, the way they manage their expenses, working capital, debt, employees, customers, and assets will be pertinent factors to judge whether or not the company has a bright future. More than that, the management of the company also needs to have skin in the game.
Stable Growth of Earnings
When a company earns profits, its shareholders receive a part of the benefit. A crucial factor when learning how to identify multibagger stocks is their ability to earn larger profits owing to their growth patterns, efficient capital management and high revenue model.
An easy way to check the standing of a company is by finding out its EPS (earnings per share).
EPS= Net Profit/ Number of outstanding shares
EPS gives an idea of how much a shareholder is earning per share. A growing EPS is a sign of a potential multi-bagger stock.
Good Promoter Holding
When you buy the stock of a company, you invest not only in the company but all that the company stands for, including its ideals, objectives and people.
But if the people who started the company no longer believe in the company and leave it idle without any efforts to improve, then the whole company may fall to ruin in the future.
If the company does not have people who believe in its success, it can never hope to become a multibagger in the future.
Fast-growing PE Ratio
PE ratio is the ratio of the stock price to the earnings per share. It gives a measure of how much the price of the share rises in comparison to the earnings a shareholder gains from each share.
A growing PE ratio, when compared to the share price, might be a sign of a multi-bagger company.
A very good way to identify a future multi-bagger stock is by looking at the margins of the company.
A successful company boasts high margins, either due to being way ahead of its competitors or by single-handedly dominating the entire market. Such stocks usually have margins that do not fluctuate quarterly.
Potential for Growth
A successful company does not put all its eggs in one basket. It usually has more than one product to sell in the market. Apart from that, it should have the vision to keep itself going forward in the dynamic state of the market.
A good multibagger corporation is able to visualize and explain its vision to its stockholder along with its plans for the future.
Smart Capital Allocation
A forward-thinking company has elaborate plans set up to use its existing funds. They are usually used for purchasing new assets and launching new products.
Good corporations also usually have little debt against equity.
They also create a good free cash flow (cash flow from operations – fixed cost of assets). This free cash flow is used for funding future advancements to aid the growth of the corporation.
The last and the most important aspect of investing in a multi-bagger stock is patience. A good chunk of multi-bagger stocks may take months, or even years to utilize their complete ability and give you the profit that you need.
It is imperative in these times that you remember what persuaded you to buy the stock and hold it for so long. You might need to motivate yourself to prevent yourself from selling the stock. The stock market is ultimately a playground where patience is the game.
With the knowledge you have in your hands now, it will not be difficult as you know how to identify multibagger in India from the sea of stocks in the stock market.
It is up to you to utilize the tools at your disposal to multiply your investment manyfold.
Multibagger stocks will always keep coming into the stock market. It is in its basic nature. All they need are an abundance of investors to provide them with the funds they need to bring a change in the world.
In case you want to get started with either of these investment types, you can connect with us at MoneyIsle and easily get started with investing.