Don't you want to invest in the stock that just keeps giving? Many investors take to the share market after being inspired by several rags-to-riches stories. Someone who invested just Rs. 1000 in Infosys stock in the 1990s could be a millionaire now. Multibagger stocks are stocks of companies that can multiply your investment several times over several years. Infosys is a giant now, but it was a startup once. With retail investing easily accessible and a booming startup ecosystem, several Indian stocks have the potential to become multi-baggers. In this blog, we will give you insights into what are multibagger stocks and how to find such stocks to build wealth rapidly.
What are Multibagger Stocks?
The term multibagger stocks was coined by Peter Lynch. These stocks give excellent returns on your initial investment. You can double, triple, and quadruple your investment by investing in such stocks. Some stocks have grown ten times or more. This means if you invest just Rs. 10000, your investment would grow to Rs. 1 lakh.
Mulitbagger stocks more commonly belong to rapidly growing companies. Sometimes, these companies may be new in booming industries or companies that have quickly innovated in established sectors. You can find multibagger stocks in several sectors that have turned small retail investors into multimillionaires.
Remember, these multibagger stocks don't just grow overnight. In order to multiply your money several times over, you need patience and invest in the right stocks for several years. Your dreams of making it big in the stock market with a small investment can become true if you identify the multibagger stocks and take positions at the right time.
How Can a Stock Become a Multibagger?
Not all company stocks can become multi-baggers. These high-growth potential companies have the following characteristics:
Advanced research and development
A company can grow rapidly only if it can increase sales massively. This is possible if the demand for the product increases in the market. A company investing in research and development to innovate producing high-quality products can enhance customer satisfaction. Startup companies that launch high-demand products with superior demand and no close alternative in the market can create massive demand. Such companies can increase capital through multibagger stock issues.
Generally, companies that monopolise a market or have a duopoly in market share can be considered multi-baggers. These companies can improve their total revenues through entry restrictions and aggressive pricing.
High Growth
All multibagger stocks have one thing in common: high growth. Lower debt liability and high profit generation are some of the features of companies with tremendous growth.
These companies also have high earnings per share, increasing dividend income for the investors. Strong financial management can be understood from a low debt-to-equity ratio. As these stocks offer higher returns, their price-to-earnings-growth PEG ratio will also be high.
Excellent top management
Companies can become multibagger stocks only with trained, experienced managers who optimise management workflow. Experts and analysts would coordinate the production and sales chain to ensure optimal pricing levels to maximise revenue.
How to Find Multibagger Stocks?
Investing in multi-bagger stocks is a calculated move. Stocks with the potential to become a multibagger in the future will be high-growth stocks. There is no foolproof formula to identify multi-baggers. However, look for the following indicators in a company:
Debt Levels
Look for organisations with lower debt levels. There is no predefined debt level varying from one industry to another. However, look for companies with debt not more than 30% of their equity value.
Quarterly Performance
Evaluate the company's revenue multiples every quarter. If they are currently low, it is because the company is performing at an operational level, which could mean it has a significant upside potential.
Earning Source
While revenue is essential, checking where the money comes from is even more critical. If the primary revenue can grow at the macro level and the operations are highly scalable, the company has a higher potential to be a multibagger stock.
Investigate Earnings and Price Multiples
Assess the trailing 12-month EPS and revenue to calculate the current price/sales and PE ratios. If the PE level growth exceeds the stock price growth, the stock can be a multi-bagger.
Watch out for Management Changes
Follow the quarterly results and annual reports that indicate the company's structural and management changes in operation. Multibagger stocks always have strong management.
Focus on the Industry
Look for stocks in an industry that can grow significantly in the next 5 to 10 years. If the industry has already reached maximum growth or there are policy hurdles, there may not be multi-baggers in that sector. Currently, the green energy, alternative fuel, and electronic vehicle sectors are growing rapidly, and choosing the right company in such sectors can turn out to be a multibagger.
Should you Invest in Multibagger Stocks?
Investing in multibagger stocks is the best way to build wealth over a long time. Investing in high-growth stocks with excellent results helps you to achieve your financial goals faster.
However, such investments can be multi-baggers only if you stay invested for the minimum period of time required for the company to generate a turnover of funds through the final products. These companies use the funds from listing shares on the stock change for research and development to create new products that generate high profits.
Here are some reasons why you should invest in multibagger stocks:
- Multibaggers have the highest potential to generate tremendous returns.
- Young companies with a bright outlook will have long-term growth, and such stocks can benefit long-term investors.
- You can boost your investment portfolio with multibaggers that can offset other non-performing assets.
Risks with Multibagger Stocks
Wealth building through multibags stock is possible only if you purchase those stocks in bulk. The potential higher returns may also result in substantial losses during a market downturn.
Sometimes, an economic bubble or value trap surrounds the multibagger stocks. Some company stocks trade at higher prices because of an asset bubble where the manufactured product is in high demand because of underlying market conditions. When the demand drops and the bubble is popped, the investors are left with a huge loss.
The product manufactured by multibagger stock companies may be profitable at the moment, but such profit may not be sustainable in the long term. Investors hope the prices will increase in the future, but that situation may not be realised because of the lack of intrinsic value in the asset.
Investors looking to invest in multibagger stocks should analyse the current financial statements, understand the existing market conditions, and predict future possibilities before investing in a large capital.
Upcoming Multibagger Stocks in India
Online stock screeners are helpful for searching for stocks with specific parameters. Finding the top multi-baggers is now easy with such screeners. All you need to do is give your custom queries, and the screener will provide you with the list of stocks that meet your criteria. Generally, to find multibagger stocks, you have to focus on parameters like market capitalisation, P/E ratio, and ROCE (ratio return on employed). Some of the upcoming multibagger stocks in India are:
Conclusion
Multibagger stocks offer immense potential to multiply your investments over time. These stocks typically belong to rapidly growing companies with advanced R&D, strong financials, and excellent management. While investing in them can lead to substantial returns, it requires careful research, patience, and a long-term commitment. For those who strategically invest, multibagger stocks can be a game-changer in achieving significant financial growth.
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