The Indian stock markets have been on an upswing even in the aftermath of pandemic and when the entire globe is in the grip of recession. FPIs are back in Indian markets, so are the retail investors. As an investor, you would not like to miss the bus.
A new investor often looks for stocks that promise more than average returns, beat mutual fund returns and the benchmarks. Every investor is chasing the elusive multi-bagger stocks that return not double, triple but in multiples of the money invested.
How do you find multibagger stocks?
There are specialized advisory firms that offer stock recommendations backed by intensive research. Then, there are open sites, media, and blogs that come up with stock recommendations from time to time. You may get ‘tips’ from friends, family and the new category of advisors known as ‘influencers’.
The brokerage firms have their list of star-marked stocks that they advise in every portfolio. Fund managers too adore multibaggers. With so much information floating around, how do we zero in on the stocks?
As a serious investor who wants to make generous returns, you need to study the basics of the stock:
Promoters and Management:
Experienced and strong management and promoters directly reflect on the future of the business. Promoters’ stake in the company is another indicator of their faith in the business they run and a comfort factor for investors that they have their skin in the game.
Management’s credibility and integrity can be gauged by their track record and books of accounts whether funds are diverted into other businesses or personal concerns.
‘Behind every stock, there is a company. Find out what it’s doing’ said Peter Lynch. A company’s business proposition, the target segment it is working on, the industry and its prospects, and overall market potential determine its growth prospects.
Revenues and profitability in the long term are impacted by how good a business is in solving the customer’s problem compared to peers. An investor must understand the company’s key moats.
High Margin business:
While a business may be performing well today, how well is it positioned to grow in future? The scalability of business proposition will define its growth. A company operating in a high margin business and a distinct competitive advantage will grow multifold and so will your investment.
Sound Financials: Look at the company’s balance sheet and yearly performance. The basic metrics like revenue, debt, earnings, cash flow, profit growth and Earnings Per Share over the years reflect the company’s financial strength and stability.
If the PE of the stock has been rising faster compared to the share price, it is an attractive multi-baggers.
Debt Levels: High levels of debt in the balance sheet will reflect on the profitability, though it varies from industry to industry. Multibaggers have a healthy cash flow which they deploy for business expansion. High Debt to Equity indicates higher risk.
A case in point is Abbott India stock. Abbott was listed on 18th October 2002 at a price of Rs 289. On 6th Dec 2022 the share price was Rs 20,387. The share price has gone up 70 times in twenty years.
Abbott India is a fastest growing pharma company, a subsidiary of US based pharma MNC. It’s a leading player in nutrition, diagnostics, pharma, diabetes care and vascular devices with leading brands under its belt. Pharma and healthcare is a sunrise industry with immense growth potential in India and globally.
From a smallcap, the scrip has grown into a large cap with market cap of Rs 43,322 cr, all in a span of 10 years.
Stock price CAGR last 10 years: 30%
Compounded Sales growth last 10 years: 13%
Compounded Profit Growth last 10 years: 21%
Promoters stake: 75%
The company is almost debt free.
EPS (last 12 mth ttm): 414
This is one way of identifying a multibagger stock. We are not saying this is the best way, but it is one of the most effective ways.
To conclude, Identifying a multibagger stock is not difficult if you have the right process mapped out.
Stick to the basics, try and iterate till you get the best result. And that is the secret to finding a multibagger stock.