What are Multibaggers? How can we find one and Invest?

 

I invested 1000 rupees in a stock and I got 20000 rupees as returns in a year when I finally booked.

Awesome right? 😜

Hey, no need to get all clumsy over this… Just like every beginner investor’s dream, this is also another figment of my imagination🤣

But how would it feel if this becomes true.? I am pretty sure that each person investing in the stock market will be dreaming of such returns or more.

Getting such high gains are difficult but possible. It is not something that happens daily in the market and this cannot happen overnight.

There was a thing in the year 2010 having worth less than a rupee for a unit but for the same unit is now trading at almost 35 lakhs with an all-time high of close to 50 lakhs achieved a few months back.

Most of you may have understood what it is from the figures I mentioned.

YES...it is Bitcoin. A perfect example of a multi-bagger.

But this blog is not to discuss about bitcoin and crypto so let us keep it aside and concentrate on multibagger stocks.

What is a Multibagger?

The answer to the heading is clear from the bitcoin example, a stock that gives returns multiple times is called a multibagger. As Wikipedia describes, multibagger stocks are stocks that give 100 times the capital as returns.

The term multibagger was coined by an American investor named Peter Lynch in his book ‘OneUp on Wall Street’ in 1988.

If a stock gives you 2 times returns then it is called a two-bagger, if thrice returns then it is a three-bagger, and if 10 times then it is a ten-bagger.

How can we find a multibagger?

Sounds very easy, right? 🤭

But it only sounds easy. Identifying a multibagger after its breakout is very easy, but to find it before the breakouts and reaping the benefits is one hell of a job.

The main reason is the lack of patience. Specifically speaking, if you get 10 or 20 times return, won't you be happy?  Hell yeah… 😂

For example, if you recollect my first sentence, I deliberately mentioned 20 times returns because even that is counted as a dream come true for most of us, isn’t it? Now imagine after booking your returns, if you see stock prices going higher again, how would you feel? Obviously, you will be disappointed. But as a good and disciplined stock market participant we should not be so sorry about this but missing a multi-bagger is always disheartening, that too if you took an early exit.

As I mentioned in my previous article (read here), we can reduce this guilt by partially booking and taking out the capital and holding the other part for reaping a multibagger opportunity.

Read the blog totally and be confident of getting a multibagger

Confidence, Patience, and Partial booking

One thing I should stress is multibagger opportunities are mainly for long-term investors. By long-term, I meant at least 5 years. There are multibaggers that gave you opportunities within a year or 2, but that is not guaranteed. You must accept this fact.

If you pick a good potential stock and your analysis confirms the potential for more growth then you can partially book profits from the stock and hold on to the rest for reaching your next target. This will help you in avoiding the blockage of your capital for a long period.

For this patience, the foremost thing you need is the confidence in your pick. If you are damn confident about a stock, then it's worth the wait. Also, by outing strict stop loss and partial booking targets you can either be profitable partially or can reduce the loss if it goes wrong.

Now let us check some qualities that a stock should possess to make us believe that it may be a future multibagger.

Common features of future Multibagger stocks

One thing I should remind you is not all stocks with these common features may become a multibagger but if a stock has these features, then it’s more likely that they may go up and bring you profits with decent percentages.

You should be very good in fundamental analysis to find such stocks with extreme precision. Don’t worry guys I am pointing out some simple ways so that at least you can check these things and analyze a stock using websites like Screener, Tickertape, etc.

That is why I am again telling you that you should be smart enough to book partial profits in the midway so that you don’t lose money or have any huge loss. Because a stock today seems to be a good one but the policy changes at the Government level or any disputes with some countries or some internal fraud in the company may affect it.

Find a Potential Sector

This is a big step where you have to use your awareness, intelligence, and common sense. With the technological developments now, there are different mediums at your fingertips to get awareness, even some intelligent people picking up stocks for you with their studies.

You have to be smart enough to check these yourself and acquire some knowledge about the specific industry and growth potential. Check the companies that are performing well in these potential sectors which are undervalued. As the industry progresses there is a high chance that these stocks can fly up and give you good returns.

For example, the EV sector and the renewable energy sector are some much-anticipated sectors to grow multifold and flourish. You can check some stocks related to these sectors and already see a boom has happened anticipating multibagger returns in the near future. E.g. Adani Green, Tata Power, Tata Chemicals, Borosil Renewables, Auto stocks inclining to EV, etc are very few examples of the many.

Look for an Undervalued stock in a Potential Sector

A stock with a low valuation is not a bad thing always. When saying this you should think vice versa too. So never be in hurry to put your money into every low-valued stock.

By an undervalued stock, I meant an undervalued stock with good fundamentals and performance. An undervalued stock with good fundamentals can attract investors at any point in time which can make it fly sky high.

A stock that already climbed can make the investors lose interest and can enter into a bubble mode which can burst and come down. Don’t jump into a running train as it is risky likewise a stock that is already flying possesses a risk of late entry.

Now you may be worrying about how to find good fundamentals, right? Don’t worry everything follows, keep reading. 😉

High Promoter Holding: This shows the faith of the promoter in the growth of the company. If the promoter is increasing the stake, then it’s a good sign.

Strong Dedicated Management: A management with a good vision that works hard for the company always increases the growth rate.

Fewer Debts: Lower debt on the books increases a company’s power to get strong in the market. Debt in different sectors is different but as a standard, a debt to equity ratio not greater than 0.3 is considered good.

Healthy Earnings: A consistently increasing earnings per share (EPS) and Price to equity (PE) ratio is a sign of growth.

Look for Revenue Multiple: A company with a lower revenue multiple is considered a cheap proposition. Such a company with strong fundamentals is expected to grow.

Always track your Stock and Sector: Checking the charts and news about your stock frequently is important. Also compare with the competitors. A sector can become weak if situations change so keeping track of this is advised.

A gentle reminder, looking at these fundamental features and picking a potential industry doesn’t guarantee you a multibagger but instead increases the probability of getting one.

The increased probability along with a lot of patience and confidence may get you a multibagger. A stock can become a multibagger within 1 or 2 years or after 5 or 10 years, many things in life are unpredictable and untimely. Your patience along with strong confidence in your pick backed by a well-defined target can get you the desired result.

Disclaimer: I am not a SEBI registered analyst or a highly successful investor all your decisions should be made your own.