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How to Find Multibagger Stocks?

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Is there a way to become wealthy?

Many of you want to know the answer to that question so that you can adopt the skills from experienced people and implement them into your journey of success. You can find out how people like Warren Buffet became rich by simply looking up that question.

In this article, we will discuss the methodology you can use to find a multi-bagger stock and invest in it.

Multibagger, we all want multibaggers. Some of the biggest investors have reached the top because they have found multibaggers. Let's take a moment to understand what a multibagger is?

What is Multibagger?

Stocks that give returns that are several times their costs are called multibaggers.

Multibagger is an investment that provides a good amount of returns more than its cost, or you can say, Stocks that Gave more than 100% return is known as a multibagger.

Let's understand it in simple terms:

Stocks that have high potential to raise funds for the firm and substantial growth, thereby providing a sound return each time referred to as multibaggers.

In other terms, a stock giving multiple fold returns is considered to be multibagger stocks.

These are businesses which have strong fundamentals and are undervalued. Multibaggers generally have high corporate governance and have businesses that are scalable.

A stellar example of a multibagger is HDFC Bank, which has completed 26 years in 2021 since its IPO in 1995. The stock has delivered a return of 25% CAGR without dividends reinvested, whereas it has delivered a 30% CAGR with dividends reinvested.

An investment of 1 lac in that IPO is worth Rs 8 crore today, which means the price has increased by 800 times.

How to identify Multibagger Stock ?

1. Strong industry tailwinds -  The first step is to find an Industry that can grow at least four times in the next 10 years. If the industry itself is not going to grow, then it will be very difficult for the company to grow.

2. Strong M.O.A.T. - Second step is to focus on a company which has a strong MOAT or a competitive advantage such as -

  • High market share
  • Lowest cost producer/unique resources
  • Scale
  • A strong brand
  • An extensive R&D capability
  • Strong technical Tie-ups or intellectual property
  • Wide distribution network
  • Favorable regulations

These competitive advantages will help the company capitalize in their industry growth and grow faster than the industry.

3. Capable Management - Choose a company with capable management.  People often underestimate the importance of capable management in a company. Choose a company which has stable management with high integrity, Choose managements which have been able to successfully navigate cyclical and technological changes.

It is always better to avoid companies where you see frequent business model changes.

4. Balance Sheet - Focus on a company with a clean balance sheet. As a ‘ballpark’ figure. Choose companies where their debt to equity ratio is less than 30%. High debt would limit the innovation and aggression of the management and the company. Also ensure that the company is able to consistently generate cash flows and a ROC of minimum 15%.

Growth without ROC and cash flows will lead the company into a debt trap.

5. Reasonable Valuations - A good company may not necessarily be a good stock. When investors overpays, even a great company's good performance can be whippet out by valuation compression over time. Even if the stock  is appropriately priced, it leaves very little room for errors and disappointments. Investors should focus on finding out the value of the company and then pay a lot less. When the price paid is a lot less, the chances of rerating increases which may lead to the stock becoming a multibagger.

6. Patience - For finding multibaggers, the most important factor is patience. Most investors cannot resist the temptation to constantly buy and sell. However great investors have succeeded because of inactivity. Investors may have found the best stock at best price but the urge to constantly act may lead them to missing out on multibaggers.

If you can not hold on to your winners over the long term then, the entire process of finding the best stock at the best prices is few times.

Conclusion:

There is no single sure shot way of finding a multibagger. However, if you keep these basic guidelines in check, you may end up making a smart pick.

Disclaimer: The stocks discussed above are not recommended by Stockdaddy, they are only picked to make you understand the concept.

Whenever stock prices fall, investors start selling their stocks.

Whenever stock prices fall, investors start buying good fundamental stocks