multi-bagger stocks are those stocks that see a rise in prices multiple times since you first invested in them. If you invested in a stock for Rs 5 and its price has doubled, it becomes a two-bagger and so on. multi-bagger stock is a penny stock that had strong fundamentals and went on to see an increase in price many times.
So, whether you are new to stock market investing or have been around, picking the right multi-bagger stocks may need research and an understanding of a company’s fundamentals. If you are wondering how to choose multi-bagger stocks for 2021, read on.
The year 2020 has been an out of the ordinary one for the economy and the stock markets. This finds reflection in the stock markets as well, as some sectors may have emerged stronger than the others. In March 2020, the markets plummeted but only bounced back quickly and towards the end of the year, the markets touched pre-Covid level highs. The year 2021 has begun on a similar high note as well.
Another answer to the question of how to choose multi-bagger stocks in 2021 is to monitor the GDP growth. As the GDP grows again, you may observe certain sectors picking up as well. Look at the larger economic picture and assess when consumer confidence bounces back. This will play a role in determining multi-baggers for the year. Government policies could benefit certain sectors so it helps to look at schemes in the year gone by. India’s Atmanirbhar Bharat scheme has meant providing an impetus to self-sufficiency. This may propel certain sectors and companies. Look at the multi-bagger stocks India may offer by assessing if the companies are in sectors that are seeing a new thrust thanks to government policies and incentives.
Also, the shift in people’s attitudes and habits can lead to new multi-baggers. For example, thanks to Covid-19, e-commerce may have seen growth in the year gone by, or the concept of insurance may have gained in importance. Also, there could have been an increase in online video streaming content, and therefore such companies may show growth trends. These are just illustrative and may help investors understand why certain sectors may be emerging as important ones for the year 2021.
All penny stocks need not necessarily turn into multi-bagger stocks. You would need to focus on these aspects for answers on how to choose multi-bagger stocks.
Look at the industry:
The first rule of picking multi-bagger stocks India has to offer in 2021 is to understand the broader theme for the year. Which industries are emerging strong and why? What is the growth prospect for a sector and how is it different from others. This rule applies not just to 2021 but in general as well.
Understanding why certain sectors may be poised for growth helps in identifying multi-bagger penny stocks in that specific sector. Looking at the scenario from March to December 2020 in India and seeing how the Covid situation has affected certain sectors or not, and what has led to the bounce-back could also help you get an understanding of how things might look in 2021. Looking at new developments in each sector, such as vaccine development and e-commerce adaption, for instance, may help you understand the big picture.
Look at the company’s offerings:
You would need to look closely at a company’s penny stock and understand what its offerings are. Does its product/service portfolio have a competitive edge? Are the prospects of such products and services gaining in-demand high? Investing in a penny stock that has multi-bagger stock potential is also about understanding demand and supply dynamics.
What are the debt levels of the company?
A good ratio to look at is the debt to equity ratio. It is a basic measure of the level of debt a company uses to operate its business. It is calculated by dividing the total liabilities by the equity of shareholders. The ratio should be lower than 0.5. Companies that have a great debt level may have problems with cash while paying back lenders and this affects cash flows.
Adequate free cash flow:
Having adequate cash flow that’s free means that there is an opportunity for growth and payment of debts, apart from distribution for those holding the company’s securities. A penny stock from such a company may show multi-bagger stock potential.
Look at the company’s margins:
The company’s gross and net profit margins should be greater than the average for the industry. The gross profit margin results from the deduction of the direct cost of goods sold (COGS) from the company’s revenue. This indicates how well a company has been managing its raw material cost. The net profit margin is indicative of how much revenue the business has collected yields a profit for the company.
Look at the earnings growth:
You can judge a company’s earnings growth by looking at its earnings per share or EPS. The EPS is arrived at by dividing the net profit of the company by the number of shares outstanding.
Look at the valuations:
A company that is undervalued and also has good fundamentals and is a penny stock has the potential for turning into a multi-bagger stock.
Management of the company and promoter holding:
A potential multi-bagger company must have solid management with a vision for growth and integrity. A sign of a trusted company comes from its strong leadership. Also, look for a promoter holding. It is the percentage of shares that the promoters hold in the company; when there is a high promoter holding it reflects the confidence they place in the company’s growth. So, for 2021, shortlist companies where promoter holding is high as one of the factors to help you pick the right multi-bagger.
In conclusion
Choosing multi-bagger stocks India may have to offer for 2021 should be based on sound fundamentals like every other year. Look at a company’s performance, growth, management, promoter holding, and debt, among others before deciding it may turn out to be a multi-bagger stock. Also, look at the bigger picture for 2021. What have economic indicators such as GDP growth or consumer confidence been like? What sectors seem poised for growth this year? The answers to these and similar questions may help you pick the right multi-bagger stocks India may offer in 2021.
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