How to Identify a Multibagger
In all our discussion about equity market we come across the question “tell me some Multibagger”. This disease of looking for a tip to identify a multibagger is not confined to your professional circle alone but any discussion regarding market veers to this even on a social gathering.
People still talk about how they missed investing in some of the greatest stocks. If only they had known at that time, their life would have been different. So the question arises: is it that difficult to identify a potential multibagger? Is there some pointers we can use to screen them, or do we need to be a genius to spot the opportunities?
We have tried to formulate the following traits that are helpful in identifying a multiplier stock, though these traits are not exhaustive but if a stock covers most of the point you could be sure that it has the potential to deliver superlative returns.
- Sustainable Growth: The market is obsessed with growth numbers and the sustainability of it. According to Gordon growth assumption, the sustainable Growth rate g = ROE * (1-Payout Ratio). So to deliver higher growth the company has to leverage its balance sheet. Also the quality of growth is important and it should not be due to one-off incident.
- Quality of Management: Honest and trustworthy management are more likely to produce an organisation that creates shareholder wealth over long term. Look around you and you would find examples of both the kinds; on one hand we have Infosys, TCS, Titan and on the other side we have the likes of GMR, Pantaloon, Adani type of companies. When an institutional investor looks to invest in a stock they give highest weightage to this aspect, as more good companies are destroyed by bad management than more bad companies could be turned around by good people.
- Scalability of Business: Any stock that has to deliver returns manifold of its present value should be in a business that is scalable, else the growth momentum would be hard to sustain over the years. Look at the multibaggers of the past, all were there when the industry was expanding and the competition was not that fierce, so they had pricing power. The overall pie was expanding rather than people trying to undercut on prices, or they operated in an industry that was at nascent stage of evolution.
- PE: The present Price Earnings ratio should be less than the growth of the company. In effect the PEG (price to growth) ratio should be less than 1. A low PE stock means that the market has not factored the growth rate and the stock is a candidate for a PE re-rating in future
- Market Cap: The market should be less than 500 crores as that gives us a small base to start with.
So, write in the comments below if you see any multibaggers.