“Make Rs 1.5 Crore with just Rs 10,000”. Crazy isn’t it? all of us have come across such clickbaity pieces on the internet and are probably guilty of clicking on them. More often than not these turn out to be “get rich quick” Ponzi schemes that all of us have been warned about by our ” once bitten, twice shy” friends. But what if I tell you, there are legitimate ways of achieving this? You can amass wealth of such epic proportions via stock market investing, with the help of what we call ” multibagger stocks“. Let’s delve deeper.

For the uninitiated, a multi-bagger is a stock that provides exceptional returns; magnified multiple times and is backed by a business that grows consistently over time. These businesses tend to have unique characteristics such as strong financial performance, reliable and capable management, efficient capital allocation strategy, and robust free cash flows. You must have heard about how behemoths like 

 Eicher Motors, MRF Ltd, Astral PolyTechnik, Vinati Organics, LA Opala RG, Poly Medicure, and the likes, have achieved phenomenal growth over the years.All these stocks have given significant returns over the years, and hence still make it to the list of multibagger stocks for 2019. Had you invested Rs 10,000 in these stocks in 2009, you would have made over millions of rupees today (see charts below). 

Trend of share price of Eicher Motors Ltd. ( as of 8th November, 2019)

Eicher Motors Stock

Trend of share price of MRF Ltd ( As of 8th November, 2019)

MRF Share price

An important thing to observe here is that these names were not created overnight. It has taken decades for these businesses to establish themselves as respected names and pioneer leaders in their respective fields. Even when these businesses were not big names, they showed immense promise and growth potential. Investors who were able to spot them and decided to stick to their guns to remain invested in these businesses are now reaping the rewards. So the important question that now needs to be answered is, ” What makes a stock a multibagger and how do I spot one? “. While there is no guarantee of assured returns once you enter the stock market, there are vital signs that can help you identify a multibagger.  Elaborated below, are the characteristics that will tell you how to identify multi-bagger stocks. Read on!

Strong And Capable Management 

Behind the sustained success of every business is strong management. This characteristic is very subjective, but you should look at multiple facets such as governance practices, board independence, diversion of funds to other businesses or for personal interest, pledging of shares, discipline with obligations, and financial matters to name a few. 

Competitive Advantage 

This is one of the essential characteristics of a multibagger. A company can stay in the competition by offering better services and products as it grows. For example, Madras Rubber Factory (MRF Ltd as it is now known as) was started by a small town balloon toy manufacturer, and the company has been improvising its products and services as per the demand of the customers. This zeal to keep innovating and tweaking or diversifying their offering as per demand has given them a competitive edge over contemporaries and kept them going strong over the years. To spot whether a company possesses a competitive advantage, see how innovative how they have been. You can do so by taking a look at the patents they have, how active their R&D wing is and how frequently they launch innovative products and services. 

How to spot? You may see the patents and R&D of the company to launch new products and services. 

Strong Promoter Holding

When you invest in a stock, you do not just invest in the business but also the people who started the same. If the person who started or conceptualized a business doesn’t remain committed to its cause and growth and has defaulted on several occasions, there is little value in even evaluating such a stock. Needless to say, substantial promoter shareholding is an essential factor to take heed of while assessing a name. 

Healthy Earnings Growth 

What a shareholder earns is nothing but the earnings (or the Profit after Tax). A multi-bagger would typically have high growth in its earnings due to its revenue growth model, profitability model, and also capital allocation model. 

You may use the formula, to estimate the earnings per share (EPS)

EPS= Net Profit/ Number of outstanding shares

The EPS shows how much a company is earning against each share. The EPS of a multi-bagger should be climbing north. 

High Margin Business 

Multi-baggers generally command high margins because either they have no competition or have a little competition but continues to hold a unique position in the industry. Moreover, these stocks tend to have a sustained margin over time that doesn’t fluctuate every quarter or year. 

Financially Conservative Approach Or Prudent Allocation Of Capital 

Multi-bagger companies tend to use their internal funds to expand or launch new products. These companies tend to have a lower debt level against equity. These companies tend to generate free cash flow (which is computed as cash flow from operations minus purchase of fixed assets). This cash flow is to be used to fund future expansions or pay dividends.

Future Growth Potential

A company may not be able to make money if it has one or little product as things are very dynamic in the current scenario the world over. One of the characteristics of a multi-bagger stock is that the management is very vocal about its vision and is able to explain the steps being taken to achieve the same. 

Conclusion

To sum up, you can easily know how to identify multibagger stocks if you spot the underlying characteristics. It is also important to note that these stocks should be invested in with a long term perspective. These businesses have stood the test of time and have taken years to establish themselves as leaders in their respective fields and hence, patience is one of the biggest virtues you need to possess if you want to benefit from a multibagger. As a retail investor, if you are looking for multibagger stocks, 2019 in India, go for a business that has a solid foundation, ethical business practices, sound growth strategy and exceptional management team to back. As long as the these are in place, you should remain invested for the long haul rather than being perturbed by short term market fluxes. Eventually, your steadfastness will be rewarded and you will be able to ride on the success of these multi-baggers.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww