Multibagger Checklist for Value Investing
Guru says: Multibagger Checklist will prevent you from recurring mistakes.
In this article you can Learn about the Professional Multibagger Checklist for Value Investing which Celebrity Investors like Warren Buffett & Charlie Munger implements.
Growth Check ensures the company & underlying sector is positioned for growth in the next 5 years to 20 years period of time.
As said before, Information Technology during 2000 was a Growth area. It created 1000 & 10000 X multibaggers during the last 20 years. We need to find out such growth sectors.
As part of the Growth aspects in Multibagger Checklist we use the following Ratios:
Check the company is having 15% Sales growth for the past 3 years & more.
Consistent Sales Growth ensures that the Company is good in their business, there is a growing customer base & probably returning customers also.
Note: Returning Customers is one of the Key aspect of all Growth business.
Example: Infosys had returning customers through Long-term Account contracts.
Page Industries had returning customers through Brand addicted customers.
Once the Sales Growth is ensured, we need to check the EPS Growth too.
EPS says the Earnings per Share – that is how the Company is converting the Sales to Profits & Allocating to Per Share.
EPS Growth of 15% above is Good.
Growth Factor alone cannot yield you to Success. You need to check the Price also. Here comes the Value Check!
Value Check ensures you are NOT buying a Maruti at the cost of a BMW!
Here you calculate the Intrinsic Value of the company using Growth parameters. Then you put a Discount of 30% on the Intrinsic Value to determine the Fair Value.
If the Fair Value is Greater than Market Price of the company, it is a Good to Buy stock!
For example let us take HDFC bank example which is a bluechip darling of lot of investors. HDFC at Rs. 900 is having EPS Growth of 20% in 2020.
The Intrinsic Value of HDFC Bank is Rs. 1200
The Fair Value is at Rs. 850 with 30% Margin of Safety!
Thus the Current Market Price is Over-valued to Buy the Stock to give Multibagger Returns.
At the same time, If the Price crashes to Rs. 500 levels then the Valuation will be good to Invest in.
You can play with our Intrinsic Value Calculator here.
Debt can give you good leverage. But it can kill you too during tough times. This is the reason Successful Investors like Warren Buffett stay away from High Debt companies.
Companies with High Debt will face difficulty during Economic downturns to pay back the Interest & thus leads to defaults.
You actually need to hold the Multibagger for 5 or 10 or 20 or More years!
As you know in Stock Market, a growth company will get 10X valuations & a defaulting company can be thrown to ashes in no-times. So it is Important for a Multibagger Investor to ensure the Debt is low or zero.
The Ratios to look over here are:
Debt Equity Ratio
Shows how much Debt is allocated on Shareholder’s equity. Lower the better. Maximum 0.4 is advised.
Example: A debt of 1 means there is 100% Debt = Rs. 1 Debt on every Rs. 1 share.
Note: Banking & Finance companies have Higher Debts as their core business is of borrowing money at low interest & selling out for more interest.
Interest Coverage Ratio
Shows how many times the Company can pay the Interest on Debt based on it’s debt.
Higher the better!
Example: If the debt is 100 Crore and the Profit is 200 Crore, the Interest Coverage Ratio will be 2!
Note: Wonderla Holidays is a Zero debt company. After the Corona troubles if you can enter the company at a lower price, It could be a Multibagger!
Integrity of the Management is important to really give you a Multibagger returns.
Often times, the Management will be Crooked enough to Think Selfishly & Fraud on Accounts to Channel Profits to the Promoter accounts thus cheating Shareholders.
If you enter such a company, your chances are less to get successful as an Investor.
You can do a Fraud Check on Google on the Promoter, Past News, Glassdoor on how they Treat their employees, P&L on proof of dividends & taxes etc.
As an example, we can see Narayana Murthy is a Top Admired CEO of all times – he was careful enough to reduce the costs, optimize profits & give back Superbagger returns to the stock investors.
We need such kind of Promoters!
You can Refer the Examples here: IOL Chemicals – Multibagger Checklist – Value Investing
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