Raghunandan Money – Investment Khushiyon Ka.

The art and science of cherry picking right multi-bagger stocks

Published : November 18, 2017

The art and science of cherry picking right multi-bagger stocks

Multi-bagger stocks picking for investment is a mixture of both art and science. It is more towards art in the beginning because many things depend upon your own judgment. Of course, judgment, in this case, is not intuition based, it must be based on some facts and figures. As we move towards finalizing any stock, we get more into science aspect of picking, i.e., search for more relevant information and analyze them.

The present blog article is in sequence to the earlier blog article which you can read here. The blog primarily explains the importance of multi-bagger stocks in our investment portfolio. Also, in details, it covers an easy approach to picking the multi-bagger stocks. In the current blog article, I will apply the same concept to select few stocks that are expected to be multi-bagger stock in coming future.

I strongly recommend to read and understand fulling the above blog before proceeding to this blog. As I assume the reader to be well versed with the techniques explained in that blog. I assume that as explained, a reader who is planning to invest in Indian stock market had made up his mind about the economic situation prevailing and the rough idea of where it is heading towards. The economy is shaping up and preparing for a new set of growth in the next very decade. The time seems to be right to enter the stock market.

Selection of a sector

Now comes the sector selection. Here is the real limitation. A very limited set of information is available on the Indian sectors on google. Don’t worry. Just think, which sector will kick-start the growth story of India in the current situation. A massive infrastructure boost is a key to success. For it huge funding needed. And so on. Freeze this idea. You get two sectors to start with, i.e., infrastructure and financial institutions including banking. Now let us concentrate on infrastructure sector. Housing, road, transportation etc. comes under infrastructure.

Steel is one the main raw material when it comes to any construction and infrastructure development. This is my own judgment and I think there is no harm in making such wild assumption at the outset. Thus, I keep the study of multi-bagger stocks selection confined to steel sector.

When I scanned for steel sector stocks listed in Indian share market, I got a list of 65 stocks of Indian steel sector. You can access the list here.

An important consideration here for all of us. The sector under study can further also be sub-grouped based on certain characteristics, which could be of great help to us. The steel sector is further sub-classified into 6 industry groups, namely, Large players, Medium & Small players, CR & HR Strips and sheet manufacturers, Pig Iron, Sponge Iron and rolling steel manufacturers.

For explaining the concept, I choose rolling steel manufacturers. There are six listed stocks in this subclass of the steel sector. Our list of 65 listed companies narrowed down to six stocks. After selecting the sector, we will now drill down our exercise of hunting these 6 stocks in little detail so as to refine our search process.

Exciting!!! Isn’t it?

Screening ownership pattern of the companies

The six companies we selected out of the list of 65 stocks. Now we will focus on them. To start with, I will first look who is holding the company and the competency of people within the organization. The shareholding breakup of each of the six company will help us in doing so.

Multi-bagger Stocks - Shareholding Breakup of Steel Rolling Companies as on 2017

For our perspective, we will group investors into short-term investors and long-term investors. Short-term investors give volatility to the stocks and long-term investors do not buy sell shares frequently and hence gives stability to stocks. The category of shareholders in general public category have comparatively short-term vision among all others.

Companies having the higher percentage of public shareholding tend to perform lower as compared to companies with less public holdings. The more holdings in the hands of investors who have the long-term vision the sharper the growth prospects. Look for diversity in shareholdings except for promoters in the long-term shareholder category. Higher the diversity better the prospects.

Rise in holdings by Mutual Funds scheme generally give an indication for the turnaround in any loss-making company. If a company is making the continuous loss, quarter after quarter and suppose suddenly few MF schemes starts showing interest in that particular company shares. This hints that the company is preparing for the turnaround. Always keep an eye on any such shares.

Side-by-side look for shares pledged by promoters. Pledging a large portion of holdings is negative from shareholder’s point of view. So, it’s better not to consider such company’s share. Based on the above discussion in the steel rolling sector, Kalyani Steel, Manaksia, and Sunflag Iron qualify for our next level of refinement in multi-bagger stocks pick. You can check the detailed shareholding here.

Proper money management is crucial for qualifying multi-bagger stocks

Post-screening for the people involved in the business, next comes how well the business is being managed. Business is all about managing the inflow and outflow of money efficiently and generates shareholder’s wealth in the longer run. Well managed businesses may also slow down due to the bad phase of the economy or other factors, however, not the profitability.

Look for year on year revenue generation, profits due to operating activities and how net profit is being generated. Profit due to operations and subsequent net profits must always be in line with total revenue generation of the companies.

If you find any company who is performing well but it’s not being reflected in its share price, then look where the money company is putting. Rise in retained earnings, year-on-year cash position and growth pattern in reserve & surplus will give you some queues on the whereabouts of the company’s profit. Companies sitting on higher reserve & surplus and retaining the large chunk of profit on the year-on-year basis is some good selection criteria for a multi-bagger candidate. You can download the detail excel.

Multi-bagger Stocks - Money Management of Companies Under Steel Rolling Sector - 2017

Debt-free or tendency of long-term-debt reduction characterizes multi-bagger stocks

Even if a company is doing well, managing incoming of money properly, yet it will fail to create shareholder’s wealth in the long run if it’s debt-laden. A large portion of profitability is eaten up by servicing debts. So, always give weight to companies which are either debt-free or is reducing its debts drastically. Faster the tendency of debt reduction by a company sharper is the turnaround. Look for the debt position and reserves & surplus position of these steel sector companies in the attached excel.

Again, all the three out beet the best companies in the steel rolling sector. This is not the end of our selection. From here comes the real skills to pick right one for your portfolio so as your returns are always optimized.

Multi-bagger Stocks - Debt Management by Companies Under Steel Rolling Companies - 2017

In this blog, we have gone through a simple but effective method of selecting stock which may give the multi-bagger return in the longer run. We have narrowed down our search to 3 quality stocks from a massive bunch of 65 odd stocks. In subsequent blog articles, we will continue our screening methodology so as to refine further to get a right multi-bagger stocks. We will concentrate on individual stocks before finalizing the stock for our portfolio. As of now, Kalyani Steel comes first in ranking, then Manaksia and last in our list is Sunflag Iron.


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