6 key points to identify a potential multibagger stock
The sustained growth and success of a business is a direct derivative of the capable management team that backs it.While it’s easy to identify a multibagger, the real benefit is seen only when you remain invested in them for a long time.
- The progressive growth of a business is directly affected by the capability of the management teams that back it.
- While it’s easy to identify a multibagger, long time investors achieve the true benefits of a multibagger stock.
In Stock investing, there are a lot of words used for stocks that give returns multiple times more than their cost of acquisition. These stocks are called Multibagger stocks. These stocks were first innovated by Peter Lynch; who published his book, One Up on Wall Street. Miraculously, these winning stocks have a unique characteristic that differentiates them from everything else. Here, We will cover how to identify and reap the benefits of wealth creation opportunities of multibagger stocks.
Factors to consider while investing in multibagger
- Bold and efficient management
A capable management team is the direct derivate of sustained growth and success in a business. To compete with top peers an able administration and strategists that drive growth is required. When you’re looking for multibaggers, It is essential to keep an eye on the governance practices, How independent the board is, are the funds being used for business growth or if they’re used for other business or personal interest, the pleading of shares, adherence to regulations and obligation, and also being able to manage stakeholders. This will give you a comprehensive study of the business determining whether they have uncompromisable standards or not. the Faults found here should be taken seriously and red flags are to watch out for.
2. Advantage over competition
Competition in the market is inevitable and only through innovation and perseverance can ensure the continued success of a business. A multibagger always scores over its peers by offering the same value propositions. It achieves this by showing customer centricity, better quality services with lower pricing, expansion of product/service suite and also constantly moving forward with the times. Only the businesses which are pioneers in their field have shown an exceptional growth over the years. they spot opportunities way before other contemporaries and acquire the first-moving advantage. Looking at any innovation of a company can directly show if the company posses a competitive advantage. You can do so by looking at the patents they have, how their research & development work, how frequently they produce innovative products or services and their pricing strategy, etc.
3. Promoter holding
If you’re investing in a business that means you’re also connecting to their beliefs in the potential of the business with the people who founded it. When the management is vocal about their future and the strategy to do the same is a sign of a multibagger. If the founders or early member are seen defaulting in certain situations, exiting the company in haste and if their shares are being relinquished then there isn’t much to understand. ie, the substantial promoter shareholding is a very essential factor to take notice if while selecting a company.
4. Progressive growth in earnings
A multibagger usually gets high growth in earning because of its revenue growth model, profitability model and also capital allocation model. The shareholder only earns from the profit of the company (earnings after-tax), therefore it is an important factor to consider while considering a multibagger. you get the complete idea about the growth potential of a business when you look into the growing earnings per share rate. You can also utilize the given formula to estimate the same. EPS= Net profit/ Number of outstanding shares. The EPS determines how much the company earns per each share.
5. Business of high margin
Another thing to consider is the output of having a competitive advantage is that the multibagger will have a high margin. The thing is to note that this is not a one-off case and these margins remain sustainable with little no fluctuations. so as you would expect the sustained profitability controls a key role in creating a multibagger.
6. Cautious capital allocation
Most multibagger companies are self-sustained. mainly because they are profitable and command a high margin. They expand their product suite using internal funds. hence, they work on little to no debt and maintain a low debt level against equity. They will generate free cash flow for a long period of time which can be used to pay dividends or be reinvested for growth and expansion.
What investors should be doing ?
Identifying a multibagger van be relatively easy, But the real rewards are given only when you remain invested for the long run. Most successful and accomplished businesses started slow and progressed over time. Huge profits rewarded for investors who committed to the growth potential of the business and patiently remains invested without fixating on market fluctuations. so be tactical in your planning and research when analysing a business for its fundamentals. while also being patient with your investments to produce results. In due course, the investor’s allegiance will be rewarded and will be able to profit from these multibaggers.