Published : November 10, 2017
Multi-bagger stocks have potential to overcome losses in your portfolio if any. If you choose a multi-bagger stocks accurately, it results in impressive portfolio return. An investor looking for multiple returns is constantly searching for a stock that might be a potential multi-bagger candidate. However, such investors are mostly seasoned stock market investors.
A piece of unbiased advice here!!!
Why only seasoned investors? Why not the whole investor community. After all the business of investment is all about returns on the invested amount. And multi-bagger stocks can’t be kept out of the preview.
An important consideration invariably keeps in the minds of investors is that along with small cap stocks or penny stocks, mid and large-cap stocks to have such potential. The only thing to scratch is the strong fundamentals and technicals that have the potency to generate multiple returns.
A lot of words around multi-bagger stocks. Now let’s understand what it actually means.
Multi-bagger stocks refers to that category of underperforming shares which have a potential for return over 100%. The term is more commonly used as an Indian financial jargon in the equity stocks market. Other similar common terms which are global in nature are a ten bagger and twenty bagger stock. Stocks that gives returns equal to 10 times are considered to be ten baggers while stocks giving a return of 20 times are twenty baggers. Thus, these multi-bagger stocks are not for day trading or swing trading but are for long-term investment purpose.
However, the challenge remains in selecting a stock that could be a multi-bagger candidate in near future. All is about picking at the right time so as to reap the benefit of multiple returns. The main task is to select a stock with promising prospects, buying at a reasonable price and then holding it patiently till the market realizes its full potential. Also, an investor must also figure out timing to exit from such stock in order to maximize benefits. Investment in such stocks can only be beneficial to investors who are willing to wait for a longer period.
After understanding the very concept of stocks that are to be considered in the category of multi-bagger, next comes its selection. But before the selection is necessary that you must develop a right mindset for investing for such a long period. Most the time issue of greed and fear creeps in that force to over judge the market condition and enable us to enter late or exit early, even though we have invested in quality stocks. This results in making losses only. So, the next section deals exclusively with it.
Picking up a stock for investment is a subject matter. It varies from person to person. However, before preparing a roadmap for that, it is always advisable to look at the external factors that affect the performance of a company you might be considering. I am talking about macro situations like economic condition and global scenario.
While looking at the macro factors, I totally agree with Morgan Stanley that Indian economy is expected to rise around $5 trillion economies by 2025 from estimated $2.2 trillion in 2017. This would be a huge jump and if the economy grows, will also reflect the growth of the businesses. No doubt, there will be a bumpy ride in the economy, earnings will fall and will bottom out thereafter. But overall green shoots and uptick will always be there to make it a $5 trillion economy. The big factors that seem to be responsible are the demographic set up, focused government and global set up favoring India.
When you, being an investor, is convinced about the stability and growth factor, you must shift your attention towards the micro factors. It basically starts with the evaluation of sector set up. Look for how stability and growth in the economy are going to benefit various sectors and at what level. Also, analyses and keep in handy the hierarchy in which the sectors will benefit. Always consider stocks from a combination of sectors that are complementary in nature.
This will not only help you make up your mind for a long-term investment but will also make you aware of strategizing your investment plan. Next comes the crucial aspect of choose handful of stocks from a bunch of over 5000 odd listed stocks over the exchanges. The last section will guide you in that.
There are no hard and fast rules for selection. The only parameter which I think to be common for everyone is the ability to understand the business and capabilities to trust the management who is responsible for running that business. If you succeed in developing both these abilities than noting will stop, you from becoming a successful investor like Warren Buffet or Rakesh Jhunjhunwala.
To begin with, you can read an analysis for multi-bagger stocks from the logistics sector. This will give you an idea on how to proceed with analyzing any stocks at its early phase.
Now comes the actual part, the actionable insight. One of the crucial signs for the multi-bagger returns is choosing those companies that are revamping its business model. May also, look for the project of the company that is lucrative and promising. Look for news, management personal interviews, etc. This will give a fair idea of the future prospects of the company’s performance.
Some of the criteria that you can consider include the following –
As I was discussing above, about choosing sectors befitting your choice of multifold return. The thing to consider first must be the sector. I will explain this with the help of an example. Suppose Mr. Rakesh is an engineer with 5 years of job as of now. He is planning to invest in Indian equities and for this, he is trying to figure out which stock to select.
Now, the problem with him is to come up with a list of few from the crowd of over 5000 listed stocks. For this, there must be some mechanism to group all the stocks based on some characteristics. Sector classification is one of the most widely used methods for grouping stocks based on similar eccentricity.
With this understanding, Mr. Rakesh got some sign of relief. He started digging into information about sectors. He came to know about major sector classifications like banking and finance, FMCG, IT, Consumer Goods, Infrastructure, Retail and etc. With this enlightenment, he ushered into new ways of analyzing.
With the knowledge of economic scenario of the country in next 10 years or so, he started figuring out the factors which will drive India into the new era of growth. He thought that, for a robust economic growth, India needs strong infrastructure, a growing and update banking system, firm financial instructions to cater the need of every stratum of society a highly talented pool of manpower and so on.
With these views, he started guessing which stocks in the respective sectors will outperform its peers and the reason behind his conceived thought. In the following paragraphs, we will see how Mr. Rakesh arrive with a bunch of Indian stocks that may turn to be multi-baggers. This will also help us understand the lying principles in selecting one for ourselves.
Let say our Mr. Rakesh picks Information Technology sector. He picked this sector as he is working with one of the companies in this sector and at least know something about the status of this sector. Now with scratching, he uncovered that more than 30 big and small companies are listed ranging from hardware, software, training, equipment manufacturers and service provides.
A good start. What he will do next. He sat with a clear mind and asked himself. Why will I put my hard earned money on anyone without knowing him properly? A valid question. He then starts searching for the persons involved in the creation of the company and one whose money had brought the company to its current position.
He realized that until he knew them, it won’t be fruitful to go ahead. So he started digging into finding information about the management, the team, and the main shareholders. This helped him understand the quality of promoters, shareholding pattern structural changes in management over time.
From the list of over 30 stocks he randomly started picking companies and initiated the composition study of shareholdings. On the team side, he searched for litigations (if any), their academic and work experience and most importantly the work culture. While going through the current and past shareholding pattern he tried to figure out the percentage of shareholders who are holding with the long-term perspective. He looked for holdings of mutual funds, institutions, banks, HNI’s FII’s and their share in the company. This will give him a clear understanding of how well the company is managed and the trust of big players in the management.
The smooth running of any business needs the uninterrupted flow of funds whenever required. This is the next important aspect which any investor must look out while making a decision on investment. How much debt the company is using, what is the proportion of profit which is going towards such debt repayment or towards interest payment. Overall how well the debt is managed is to be looked after. If the company is generating sales but profit is negligible or negative, then look for where the earnings are being adjusted.
Next look for the status of reserve and surplus of the company. You must analyze that how many portions of the yearly profit is being transferred to such reserves and what part is being distributed back to shareholders through dividends. And also, how much is pumped back into the company for expansion. This will give you some idea of its fund’s management.
Thus, knowing the sources of funds that company is using to run or to expand the business will give you a sense of security. It will also hint you about how fast your wealth creation is possible if you put your hard earned with the company by becoming a minority shareholder.
Timing the entry and exit plays a very crucial role in wealth creation when it comes to stock market investing. And to time the entry in making a purchase of any of such stocks that have the capability of generating multi-bagger returns, you need to evaluate the current status and future plans of the company. Also, you have to check that how the company had done in past when it comes to future plan. Dig on information for few past years about managements future plans and see how they succeeded in implementing those plans. This will show the future prospects of current plans as well.
Understanding the market size of product and services the company offers and its current share in overall market will also help you decide the entry time. If you analyze the historical pattern of quarterly earnings of that company, it will really be very helpful. See for which quarter sales are low and in which high and the shares price performance thereafter. This will make you confident in timing the entry.
Investing in an Indian stock that can turn out to be a multi-bagger is what any investment portfolio needs. Who doesn’t want their wealth to grow? If you had stepped into an earning population then it’s your responsibility to secure your future. This you can do by investing somewhere and creating an investment portfolio. And if your portfolio is without a multi-bagger, then it’s a crime towards your future financial safety.
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