Last Updated on: 6th January 2025, 01:49 am
Choosing potential multibagger(stock that gives returns many times of the investment amount) stock requires indepth study of stocks and also carefull analysis.Although there is no fullproof method to choose a multibagger stock.Here are some guidelines which can help to find a potential multibagger.
1.Research and Understand the Business:
Knowing the business of the company is very important,that is what product/services company is selling,what is its business model, what is the competition in that area and the company’s strength or where it stands witin the competition.Also need to understand the company’s growth prospect and the future profit drivers.
Business Model: One must look for company with simple and sustainable business model and how it would stand out from competition
Example: Trent Ltd ,a Tata group company operates with premium brand store Westside which catered to upper middle class,then it saw that there is a huge market for economy segment in the retail and although there are stores offering apparels which catered to economy segment,they lacked the quality and did not fulfilled the criteria ‘value for money’.So,Zudio was started,which focussed on affordable fashion catering to India’s growing middle class.Zudio was stated in 2016,but it spun out seperately in 2018 and presently runs 546 stores(2024)..This gave a boom to its share price and it skyrocketed from Rs.300 in 2018 to Rs.8000 in 2024.
Key Learning:A perfect business model,with strong brand recognition, high scalability especially backed by India’s rising consumption story gives birth to multibaggers like Trent.
2.Financials:
Look for stocks with strong financials which is critical in assessing its potential to become multibagger.Let us discuss some of the key factors to analyse the financials
a)Balance Sheet:Studying company balance sheet gives insight into financial health of a company. Some points to consider are:
i) Low debt level– The debt level should be minimal so that the company can sustain growth without any stress on its financials.Company with low debt can easily invest in expansion.
ii) Capital Dilution : There should not be a capital dilution,means when we see there is increase in equity capital in the balance sheet,this shows the capital is diluting and it is not good for shareholders.This generally happens when company issues too many new shares to raise capital which dilutes the value for existing shareholders.
Let us take an example -Mr A holds 500 shares in ABC ltd whose current EPS is Rs.2 per share.The company has 100000 shares issued.Now the company further issued 100000 shares .So the earning per share(EPS) will be Rs.Re.1 per share.Thus the earning of Mr.A would decrease to Rs 500 from Rs 1000,provided he has not purchased additional shares.
iii)Reserve: Reserve is created out of profit of the company.The profit which company makes and does not distribute but re invest in business is found in reserve.Increasing reserve is possitive for the company.Reserve should not be negative or decreasing.
b)Cash Flow: Cash flow should be healthy,which means if we see the cash flow statement there should be possitive cash flow from operating activities.This indicates that the profit company is earning is realised in cash and not stuck in debtors.Moreover if there is no healthy cash flow there could be more chances of manipulation or showing inflated profit.Moreover negative or decrasing cash flow is not a good sign.This could be probably there is a push sales and there is poor demand for the company’s product.
3.Promoter stake:
It is the owner of the business who knows it best.And if promoter’s stake is reducing or is below 50% ,then he will not have control over the business and decisions would be delayed and he will not be able to run the show as per his will. One should also check whether the promoter stake is pledged or not.One should avoid such stock where the promoter stake is decreasing or very low and also if the substantial part of it is pledged.
4.Management Quality:
It is the management and its vision which drive a company to achieve its long term goal.Now what an individual investor can do is check about the promoters and their track record this can be done from information available in the web.Following points to be checked in addition.
i) Shareholding Pattern: A high promoter holding with no pledge is a healthy sign.
ii) Capital Allocation: Analyse if the management reinvest profit effectively and do not misutilise it.
5.Look for Undervalued stocks:
One should avoid overvalued stocks.Analyse stock on parameters like ,peer comparison,Price to Earning (P/E),Price to Sales ,and Price to Book value(P/B).These should always be compared with peers ,means other companies in the same line of business.
6.Growth Potential:
Assesing what is the growth potential is one of the most important point to identify multibagger stock.Following points could be the growth drivers:
i)Product innovation : Companies with innovative product or services can gain substantial market quickly.This could be as a result of technology upgradation also.For example Websol Energy System Ltd was revamping its production line in 2023 to adopt new technology which would reduce the cost of the product and increase its efficiency.After its production started the stock price skyrocketed from Rs.244 to Rs.1832.
ii)Favourable sector: If the company is in a sector which will be benefitted from regulatory changes,consumer demand,or technological changes,it could give multibagger returns,provided other factors being favourable.As for example the solar sector and chip manufacturing.
7.Market Trends :
Stock price increases when market notices and realise its potential and is ready to pay increased price for it.One needs to identify such stocks in advance or at the initiation point.
i)Lesser known stocks : Stocks which are lesser known but are potential considering all the factors discussed above could give multibagger return when it would be identified. For example Lotus chocolate a lesser known stock when Reliance acquired it ,after almost 9 months when it showed the result of change in management,the share price went up from Rs.290 to Rs.2609(all time high),in a year.
What to Avoid?
Unethical practices : Earlier it was tough to find out wether a company has some rout in the past or not.But now a days with so much available data and social media one can easily find out if there is something wrong about the company or its management , in the past or not.
One must search about the company and its promoters.I myself look who are the promoters and search about them in the web and if i find something doubtful i stay away from such company.
Patience and vision .
For s stock to be multibagger,usually a long term vision is required .One must keep a vidion of at leadt 5 plus years and invest accordingly.But do not sit blindly kerp track of its financials with quaterly results.
The process
Make a checklist of the above points and study and see if your choosen stock satisfies all crieteria or not.Remember compromising any of the point could cost your hard earned money.
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