Multibagger and Ten bagger are words first phrased by Peter Lynch in his book “One up on Wall Street”. According to his book Multibagger is a stock which gives exponential returns in a short period of time. For example, if a stock was valued at $100 three years ago. Now the stock is trading at $500 which is increased 400%. In the span of 3 years which became as 5 bagger. If you want to learn what is multibagger stocks and how to find one lets understand this in detail.
What Is Multibagger Stocks Exactly?
When a stock appreciates 10 times of its value in few years, it is a 10 bagger. Usually market assumption is that a stock becomes a multibagger when it appreciates from being a penny stock, but it is not true always. There are so many stocks which are not penny stocks still has the potential to become multibagger. Having exceptional earnings growth and efficient management reflects the stock to be appreciate exponentially.
How To Find A Multibagger In The Market?
Finding a good stock is not a rocket science, as an investor I have been picking stocks from past 10 years. I can state with my experience that a common man using 1% of his brain can pick a stock with ease.
In general, people take advice from stock brokers and random famous persons advice. Just because of some famous person is buying a stock that does not mean you have to buy the same. There are number of reasons to ignore what others are buying. Firstly he might be wrong, as you do not know his intention or potential to analyse a stock. Second even if he is right, you will never find out when he changed his mind and sold the stock. Third you have multiple sources to analyse a stock. So, never blindly follow someone’s advice and always keep track on your investments.
There are few characteristics of multibagger they are as follows:
Earnings growth:
There are so many factors which influence a stock to move but I believe earnings is the backbone behind every stock. In the short term a stock price may be influenced by market forces for example good news about the company such as winning a new contract or project. Overall economic development also influences the stock price. However, when a company has good earnings the stock price follows. Even if there is bad new and external factors are pulling the stock price down, market will correct itself due to earnings.
There is a difference between earnings and earnings growth, if a stock XYZ ltd grows from $5 to $10. It has given a return of 100% where as a stock ABC ltd grows from $50 to $60, it has given a return of 20%. Although the earnings in ABC ltd are high $10 per share but growth rate is 100% in XYZ ltd. If you have invested a $1000 in both companies at the same time, your money would have been doubled $2000 in XYZ ltd where as in ABC ltd your investments value would be $1200. In conclusion high earnings growth is a major factor for a stock to become multibagger.
Efficient management:
Management plays a major role in companies’ development, as in large cap we can see there are people to manage every thing and responsibility is divided among experienced people. However in small companies its really important to know how the management is conducting day to day operational activities. For example management should know how to efficiently manage sales and inventory. If a company has high growth, then keeping sufficient inventory would help in the times of abnormal sales. Management has a duty to invest the money responsibly, generated form revenue in the time of growth. As bad investments would lead to loosing investments and block for the future growth. It is really important to see how the management is raising their funds either equity or debt. If company is using debt, then you should know are those profits goo enough to repay the loan?
Overall inefficient management is unable to direct the company towards right direction even though the company is having high earning growth, management should be efficient to sustain the growth in the future.
What Is A Good Multibagger Stocks?
Multibagger stocks which gives good returns is a myth, Benjamin Graham quoted “Although there are good and bad companies there is no such thing as good stock or a bad stock, there are only good stock prices which come and go.”
Why You Need To Invest In A Multibagger?
Now you know what is multibagger stocks, Investing in this kind of stocks can increase your investment manifold as it has high growth potential. Investments in such potential stocks in times could be a test of patience because the market might not recognize the stocks potential yet as you did. The money invested through stocks will be used by the company in research and development, operations, marketing and various other things in the organisation. It takes time to generate serious profits from sales. So, you need to give some time to convert this investment into double or triple your invested amount.
Most of the self-made rich people became rich by multibagger’ s, let me explain how. In general, if you diversify your portfolio your returns might be similar to a popular indexes such as nifty 50. If you invest in small cap which has potential to become a ten bagger your returns would be 10 times of what you have invested. For example, Suzlon ltd was trading at Rs. 9.8 on Jan-2023 but after one year on Jan-2024 the stock was trading at Rs.45.90 which appreciated more than 4 times the share price.
When it comes to business, a person obliged to put all his money in to his start up in the initial stage this is also a kind of investment don’t you think. Like Mark Cuban said you have to be right only once to become successful. If the start up works it is a kind of multibagger that can make you rich.
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Strategy To Invest In Multibagger Stocks.
Let me give you a strategy for multibagger investments. Strategy is to invest in 10 different stock in which 5 are safe and gives stable returns. Where as, remaining 5 invest in growth opportunities which you thing is going to be next multibagger. In this strategy if no stock outperforms the market and gives you unexpected returns then your returns would be similar to market returns as you made a diversified portfolio. If any one stocks turns out to be a ten bagger your invested value would be more than double of what you have invested.
Risk associated with Multibagger?
Some times these stocks are penny stocks but not always true. So an investor needs to buy in bulk in order to get maximum benefit from the returns. If the stock price does not increase as expected the loss could be huge as well.
A lay man may think certain product has tremendous sales in the market so why not invest in that particular stock? Off course you can but before you invest in the company you are advised to analyse the financial statements of the company because although the sales are high the profit margin might be low or high in debt, leads to no earnings growth.
Most investors get into a multibagger after the ride, because they could not identify it earlier. Until they have read in a newspaper or heard from a friend, so they are already late to the party. Now there is a high chance of losing money or not seeing the expected growth in the prices seems disappointing.
Conclusion
Going for a multibagger is a wonderful idea if you know what is multibagger stocks. But before investing make sure you analyse the company properly. Always remember earnings is the backbone for a stock to skyrocket. Every now and then investors think there are no more manifold investments. But market will always surprise you with new investments which can grow exponentially. So keep looking for multi baggers and keep making money from market.