Introduction
It is hard to be a middle-class Indian trying to save money as savings are constantly being beaten by the high inflation all around. It, therefore, becomes important to invest those savings in stocks that can double or multiply the same.
Multibagger stocks offer a solution for this as these are stocks whose prices increase manifold over time – the term two-bagger indicates 100% increase in stock price, three-bagger 200% stock price growth and so on (a bag basically represents the first investment). The term is a baseball reference where players accumulate bags as they run bases. The term was used in the book ‘One up on Wall Street’ by Peter Lynch.
Multibagger stocks are considered the ideal investment in India as they do not require the constant attention of intraday trading but give high returns of many times their original price. Their EMA and P/E Ratios see tremendous growth simultaneously once the momentum picks up as people are always lying in wait for multibagger stocks, especially if they were originally penny stocks.
Multibagger stocks have certain characteristics that are present across the board. Some of them are discussed below.
Characteristics of companies with multibagger stocks
1. Ability to seize large gaps in the Indian and the global economy
You must know that any stock’s performance depends a lot on factors beyond the control of the company itself such as the economy, competition, market sentiment etc. However, how a company is able to manipulate or adjust such situations is the deciding factor.
For example, post the beginning of the Russian operations in Ukraine, the supply of wheat and fertilisers is suspected to decrease due to supply chain bottlenecks. Therefore, the share prices of Sharda Cropchem Ltd (an agrochemicals company), Adani Wilmar and ITC (both of which produce wheat) have all increased by many times since the war started in February 2022. This is because the market was confident of its capability to plug in the gaps in the global supplies of such products.
Investors can check if the company is capable of this by checking if it is backed by a strong product that is of export quality and if it can increase or decrease production with speed and efficiency.
2. Businesses that hold solid ground in a booming sector
The best example of this could be Shanti Educational Initiatives Ltd whose share price has increased from Rs 10 in January 2022 to Rs 116 in July 2022. It is one of the leaders in the school management solutions market which is booming in India due to the digital education drive since the pandemic.
Adani ports and SEZ Ltd have almost quadrupled their share prices since the pandemic started. Its year-on-year growth in cargo in its Mundra port has allowed it to surpass JNPT as the busiest port in India which has led to growing share market confidence in its stock.
Another example of this phenomenon can be Cholamandalam Investment and Finance Co. Ltd. (CIFCL or CHOLAFIN) which has a strong presence in the market of small finance banks (a growing sector due to increased volume of corporate, MSME and retail loans). Starting from May’20 at Rs 136, its stock price reached Rs 789 in August’22.
3. High increases in revenue or market share, despite fluctuating profits
The best example of this category would have to be a classic case of multibagger stock that is Kaiser Corporation Ltd which has given incredible returns (from Rs 3 in January 2022 to Rs 130 in April 2022). This was possible due to its rapid growth in the growing sector of labelling, packaging and stationery.
Another success story in this sector can be Varun Beverages Ltd. It is one of the largest bottling companies in India with several major tie-ups. Its stock price rose from Rs 242 in April’20 to Rs 1074 in Aug’22.
Another great example of multibagger stocks is SEL Manufacturing Company Ltd (a textile company) whose share price rose from Rs 44 in January 2022 to Rs 1881 in April 2022. It did so, despite the company making losses, by maintaining a steady increase in sales revenue.
General characteristics
There are certain minimum financial requirements that a company must fulfil in order for you as a customer to have confidence in it.
- Its quick ratio should be stable, at around 1 – the quick ratio is the ratio of current assets minus the inventory and prepaid expenses to current liabilities. It shows whether the company has enough money to pay off short-term liabilities if needed. This becomes especially important for penny stocks of companies which do not have the financial clout to call upon bank loans whenever needed.
- A unique or largely unrivalled value in a supply chain of an important product – it ensures that in the event of an economic downturn, it is unlikely to go bankrupt and during an economic boom it is likely to be capable of raising its price.
- The ability to scale up – this requires a review of the management team, the right infrastructure and supply chain management strategy. They should be capable of maintaining the same or greater level of efficiency and profits once they start scaling up their business (which is when major growths in stock prices will occur).
- High net profit margins are an additional plus point that confirms the financial viability of the business model. You can check the company’s earnings by checking the EPS and comparing it to the industry average.
- Usually such stocks are initially penny stocks of small cap companies as it gives greater chance of multibagger growth. Therefore they are hard to find and research on. Trading in penny stocks is not liquid as it is hard to find too many buyers or sellers of such stocks easily and with small lot sizes.
Conclusion
Any stakeholder in the stock market must be aware of the larger trends that overshadow the smaller fluctuations in the stock market. Multibagger stocks do not emerge without strong support from the surrounding circumstances. So whatever the level at which you are playing, it is always a good idea to be aware of what is happening at least one level above. Study the market and only then look at the fundamentals of smaller stocks with high returns. If you already have a few multibagger stocks in mind, try opening a demat account and start trading today.
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