Multibagger Stocks – A Lock Down was imposed by the government of India due to COVID-19 from March 24, 2020. Unlock1 is declared from 1st June 2020. During the LockDown period Sensex has logged the biggest loss ever. Sensex and Nifty declined by almost 35%. Although D-street was going through a bad phase (during lockdown) few stocks have given skyrocketing performance and turned out to be multi-baggers.
First of all, let’s try to understand what is multibagger stock? If you are familiar with term multibagger you can skip to the next section.
Multibagger stocks are equity shares that give returns of more than 100%. The multibagger term was coined by Peter Lynch – American Investor & philanthropist.
In simple terms, multibagger means multiple bags. The stock that grows multiple times with respect to capital invested by you and you need multiple bags to keep returns given by stock is known as multibagger stock.
- Stock with 100% returns – 1 bagger stock
- Stock with 500% returns – 5 bagger stock
- Stocks with 1000% returns – 10 bagger stock
This means that you can create a massive wealth by investing in multibagger stock. Investment guru Warren Buffett, Big Bull Rakesh Jhunjhunwala have used a similar approach to become wealthy. They have beaten the market by constantly banking on multibagger stocks. However, finding a multibagger stock from the market is not a child’s play.
Here is a guide that will help you in finding multibagger stocks for investment.
How to Find Multibagger Stocks for Investment?
Finding a multibagger stock is an art, very few can master it. I am trying to learn it. Here are the factors that I consider in finding multibagger stocks.
Factors to Consider in Finding Multibagger Stocks
#1 Growth of Company
The growth of the company is very important while making a selection of the stock. Here I would like to state that stocks are not lottery tickets. When you are investing in stock you are becoming a partner in the business & you should become a partner only in the growing company.
When you are evaluating a company you should look at the two types of growth Sales Growth and Profit Growth.
Sales growth means growth in the business. It indicates that the company is receiving orders and product of the company is in demand. You will see sales growth data in the balance sheet of the company. You should see at least last five years of data.
Profit growth means growth in profit. Along with sales, profit is also important. Profit growth indicates that the company is not taking orders on a low-profit margin or negative margin for increasing sales growth. The company should be posting sales and profit margins over 20% year on year.
#2 Debt on the company & D/E Ratio
Debt on the company is another important factor to consider. The company where you are investing money should be debt-free. You should also check for D/E ratio before investing in the company.
D/E ratio means the debt to equity ratio. In D/E ratio, D is debt and E is Equity (shareholders fund). This ratio indicates the debt level of a company in regards to shareholders’ funds.
D/E ratio of the company should be less than one. If this ratio is higher than one means the company has taken more debt compared to the shareholder’s fund.
You should prefer the companies with D/E ratio in the range of 0.5 to 0.7.
#3 ROCE & ROE
ROCE means Return on capital employed. ROCE is expressed as EBIT (Earning before interest and tax) divided by capital employed. This ratio is useful to measure a company’s performance. ROE is a return on equity it is the ratio of net profit to the share-holders equity.
ROCE and ROE are used to determine how the company is making use of capital efficiently. ROCE and ROE should be higher.
#4 Free Cashflow
Free Cashflow is another important factor to consider while selecting a stock. This factor is mostly ignored by investors.
Free Cash Flow means cash flow or cash generated by the company in a specific period. You should look at the cash flow statement of the company. Cash flow statement summarized the amount of cash entering and leaving the company.
This factor indicates the company is collecting the cash efficiently and maintaining strict payment terms with vendors and customers.
The cash flow of the company should be positive and should be growing.
#5 Competitive Advantage
The company should have a competitive advantage over others. It is preferred that the company is selling monopoly products or services. One such example is Eicher Motors. Eicher motor is selling unique product Royal Enfield. A monopoly business means no competitor. The chance of turning these types of companies into multibagger is very high.
The company should be focusing on innovation and constantly enhancing product or service portfolio. One good example here is Reliance Jio. Reliance Jio started with a Mobile carrier business. Later stage added cable connection and Internet business. Now Jio is about to enter into home grocery delivery business JioMart by making use of the technology.
You should find out these types of companies where the chance of turning into multibagger is very high.
#7 Small Cap Stocks over Large Cap
You should prefer small cap stocks over large cap. Look for small companies that are already profitable and have proven that their concept can be replicated. Remember – Big companies have small moves and small companies have big moves.
Over the long term it’s better to buy stocks in small companies.
10 Multibagger stocks of LockDown 2020
Stocks that have given massive returns and doubled investors wealth are Jain Irrigation system, Adani Green Energy, Hathway Cable, Jubilant Life Science, Aurobindo Pharma, KRBL etc.
A list of Multibagger stocks of Lockdown 2020 are given below.
Should you invest in these stocks?
The stocks given above have generated very good returns for the investors during lockdown. But, that does not mean that these stocks are likely to generate similar returns for the investors in the future.
You should look at the fundamentals of the stock rather than looking at past return history. The company with strong fundamental, revenue visibility, good product profile will survive and succeed post covid era.
Remember Peter Lynch’s Golden Rules while investing in the stock market.
- Never Invest in a company without first understanding its financials
- Do not expect too much, too soon. Think long term.
- Don’t buy something you can’t illustrate with a crayon.
- Owning a stock is like having children. Do not have more than you can handle.
Happy Investing 🙂