How to Find Multibagger Stocks? Where to invest money for getting multibagger returns? These are the most frequently asked questions by stock market investors. I have received many e-mails asking for recommendations and suggestions about multi-bagger stocks. The common questions asked by the investors are –
- Tell me the name of stock which can double my money.
- Which stock will be next multibagger like Eicher Motors?
- Can you recommend good stock for investing which can make me millionaire?
Well, instead of recommending a specific stock, I decided to write the post about – How to identify multi-bagger stocks?
Multibagger stocks are stocks that provide extraordinary returns to investors. Suppose you have purchased stock with Rs.100 and after few years you sold it for Rs.500, then it is 5-bagger stock for you.
Similarly, if you got 10 times returns on your original investment it is 10-bagger stock.
Remember, you will not get an overnight return in these types of stock. You need to wait for a few months or years to get returns.
A true multibagger stock can multiply your wealth and you can become a millionaire by investing in these types of stocks. However, it is difficult to identify such stocks. You need to do a lot of research to find such stocks. In order to help you, here is complete information about finding multi-bagger stocks.
How to Find Multibagger Stocks?
In order to find multibagger stocks logically, you need to two types of research/analysis about stock.
- Qualitative Analysis
Qualitative analysis is a scientific method of observation to gather non-numerical data about the stock. This includes brands, product range, management, promoter holding etc.
- Quantitative Analysis
Quantitative analysis is a method of getting numerical (quantity) data about the stock and doing analysis. This includes financials, cash flow, debt level etc.
First let’s try to focus on qualitative factors of the stocks.
Competitive advantage means favorable circumstances that put business ahead of the competition. It includes products & services. You also need to consider branding as well as a monopoly in business. This factor allows a business to perform better and get price advantage and market share over peers.
In order to find this quality, you need to ask the following questions while analyzing a stock.
Do the company offer unique products? – A company can achieve a competitive edge via unique products. You need to check if the company is offering unique products or not. A company like Reliance Jio is offering Jio Fiber at a competitive rate. This gives a durable competitive advantage of Reliance Jio.
Do the company has established a big brand or in a monopoly business? – Another thing to check is a monopoly in business by the company. A monopoly business means higher profit margin and more returns. A company should have a preferably big brand name and high entry barrier.
Strong and Capable Management
A company should be in a safe hand. You should check for the honesty and capability of the management. Only strong management is not enough. Management should have a future goal and plan to achieve it. To find out this quality you need to ask the following question while analyzing a stock.
Do the company have a clear goal for the business in the future? – A company should be clear about goals and future business prospects. Honest management plays a crucial role here. You can get information about this by reading an annual report or going through management interviews.
In addition to the goal set by the management, you should also look that goals are realistic or not. A company should be able to demonstrate how they are going to achieve that.
You should also check if management has a proven track record and history of achieving past goals or not.
Strong Promoter Holdings
Strong promoter holding is the next important factor to check. Promoter means people that start, fund and operate a business.
A company with strong promoter holding indicates the trust of the founders in the business. A low promoter holding indicates promoter has less faith in the business and they have pulled out money from the business.
A promoter holding should be at least 50% or above. In a few cases, you may not find strong promoter holdings as holding is distributed to multiple holders including institution and public.
Now let’s try to look at quantitative factors of the stocks.
The stock should be sound fundamentally. To evaluate the fundamental of stocks you need to check the quantitative characteristics of the stock. You can do that by evaluating the financial statement and quarterly results of the business.
High Earning Growth
Earning growth is the first quantitative factor to consider. A company should have high earning growth. Earning growth is the annual growth rate of earning from investment. This factor provide valuable information such as how fast a company is growing.
One of the best way to know earning growth is via EPS (Earning per Share). EPS is calculated by dividing net profit by total number of shares. This shows how much company is earning against each share. EPS of stock should be higher.
One year EPS is not enough while evaluating. You should consider past three years EPS while evaluating stock.
High Net Profit Margin
High net profit margin is another quantitative factor for consideration. A company should be performing well and should have a high net profit margin. You can calculate Net Profit Margin by dividing net profit by total sales of the company. A multibagger stock should have a higher profit margin.
You should consider the past three years’ net profit margin while evaluating a stock.
Low Debt Level
Debt is bad for any company. It can destroy a business at any time. When you are evaluating stock you should look at the stock with low or nil debt level. A debt-free company is a very good candidate for multibagger.
You can get information about the debt level from the balance sheet of the company.
Free Cash Flow
Free cash flow is the next quantitative factor to consider. Free Cash Flow is total cash left with the company after making capital expenditures such as the purchase of plant, machinery, technology, etc.
Free cash flow can be used for business expansion, new product development, debt payment or dividend distribution. You can get information about free cash flow from the financial statement of the company. You need to subtract capital expenditures from operating cash flow to get this information.
A company should be generating free cash flow year on year. This is one of the factors that helps the stock to become a multibagger.
Note – I have tried to list down characteristics that are useful for identifying multi-bagger stocks. If you find the above information useful, do share it with your friends and collogues via Facebook, Twitter or WhatsApp.