Important Rules to follow while Picking Multibagger Stocks
During last decade post global financial crisis of 2009, there are numerous companies which have multiplied investor’s capital delivering super-duper multibagger returns. Similarly, there are plenty of companies which have destroyed investor’s capital to almost zero over last 10 years.
Over last 2.5 years, most of the retail investors experienced lot of pain in their equity portfolio till March 2020. In fact, many retail investors who entered in equity market during 2016 - 2017 were in complete dilemma to know whether the stocks in their portfolio are good long term investment candidates or the dud stocks.
Hence, its important to know the basic criteria’s which make a company a right investment candidate with potential to multiply wealth in long term.
Rules to follow while Identifying Multibagger Stocks
Below are the 6 basic rules which we must follow to pick right companies having multibagger potential.
1. Quality management with high integrity
Alignment of management interest with minority shareholders is one of the key parameter. High standard of corporate governance ensures that company is not involved in any wrong doings. Proper and timely disclosures of shareholder related information by the companies build trust over time. Past track record of promoters, disclosures and dividend pay-out history can help us to check on this crucial parameter.
If the management is not honest, will they want to share the goodies with you? No, they will look for the first opportunity to siphon off the profits and pull the wool over your eyes. We have seen how the investors of LEEL Electricals have lost 95% of their capital over last 1 year due to personal enrichment of LEEL promoters by siphoning off company's profit from the sale of its consumer durable division to Havells.
2. High ROE & ROCE – Efficient use of capital
Return on Equity (ROE) measures a company's profitability by comparing its net income to shareholders equity (book value). ROE is a speed limit on self-funded growth (company's profit). That is, a company cant grow earnings faster than its ROE without raising cash by borrowing or selling more shares. For instance, a 15% ROE means that the company can’t grow earnings faster than 15% annually by relying only on profit to fuel growth. ROCE measures the overall returns for all stakeholders and is a relatively good measure of the overall efficiency of the company. A consistently low ROCE signifies that there is something inherently wrong with the business or the company.
Wealth creator stocks usually have very high ROE and the ROCE relative to the rest of the industry. Typically, companies with high ROCE and ROE would also be generating positive free cash flows consistently. Increasing ROE and ROCE every passing year with low / negligible debt on books is one of the key aspect in spotting multibagger stocks.
3. Low Debt and Free Cash Flows
Its important to learn the lesson from financial crisis of 2011 and now of 2019 that companies with high debt simply get slaughtered. While debt is not bad in case if the company is able to borrow at a lower rate and deploy it in its business at a higher rate as the operating leverage works in its favour, however excessive debt with high interest and repayment obligations can crunch the stock in times of downturn. So, as a long-term investment philosophy, it is best to steer clear of high-debt companies.
Episode of stock prices falling like nine pins over last 2 years of ADAG companies (Reliance Power, Reliance Infra, Reliance Com, Reliance Capital), Essel group companies, Jain Irrigation etc indicates how unbearable high debt burden on books can destroy investors wealth in shortest span of time.
4. Asset Light Business Model - No High Capex Requirements
We know the demerits of investing in stocks like Suzlon & GMR Infra which have an insatiable appetite for more and more capital. To feed their perennial hunger, these companies dilute their equity by making FPOs, GDRs & FCCBs resulting in total destruction of shareholders wealth. This is the simple reason why we do not see multi-bagger opportunities from sectors like metals, infrastructure and utilities because of the capital intensive business model which leads to very high leverage and low return ratios.
Companies should be lean and mean requiring minimal capital but generating huge returns with free cash flows which can be used not only to reward shareholders but also to expand business in future. It is not necessary that company should be a zero-debt company as some amount of leverage can actually improve shareholders returns.
5. The Scale of Opportunity & Non-cyclical Business
Multi-bagger stocks are created because they are able to scale the opportunity rapidly. Titan Industries is a great example. In 2003-04, Titan was a small company with market capital of 500 crores. As on date, its a large cap with more than 1 lakh crores market cap. The fact that India is a booming marketplace of 135 crores consumers means that most products and services have a head start at trying to scale up their activities.
One key factor that creates value in the stock market is consistent growth across economic & market cycles. While markets values growth, it also pay higher premium on consistency in growth. Most of multi-baggers of past like Asian Paints, Titan, Page Industries, United Spirits, Marico, Aurobindo Pharma are typically high growth companies in non-cyclical businesses. It is extremely rare to find a multi-bagger in a typical commodity business like steel, aluminium or oil.
6. Valuations & Future Growth Prospects
Most investors are obsessed about valuations, refusing to buy any stock that is expensive. However, one must remember that expensive is a relative term. If a stock is compounding at 25% on an annual basis, paying a price to earning multiple (P/E ratio) of 30 may be very reasonable. A stock like Nestle or HUL, for instance, has always been expensive. However, a great company with an impeccable pedigree may not always be a good stock to buy. This could be due to the fact that most of the triggers are already in the price and future growth potential does not justify the valuations. The PEG ratio (which is PE ratio divided by sustainable growth) is a simple way to measure valuation relative to growth.
But it is equally important to consider other parameters like financial ratios and brands that the company has created which can go a long way in determining potential valuation. A particular company may look expensive to an investor who have a 2 years horizon but may be a screaming buy for investor who wish to hold it for next 5 to 7 years.
There is no guarantee that the above mentioned parameters would always help investors identify multi-baggers, but these parameters will surely help investors to invest in right set of companies and avoiding those which may end up being value destructors. Moreover, we can learn by following key traits of successful investors who have created enormous wealth in past.
Making Money by Investing in Fast Growth Multibagger Stocks
“The investor of today does not profit from yesterday’s growth.” Warren Buffett
Infy has given CAGR returns of whopping 44% to investors during last 27 years (that too after keeping dividend payouts aside). Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at ~9.41 crores today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?
Peter Lynch 2 Minutes Drill to Shortlist Potential Multibaggers
The key parameters involved in Peter Lynch’s ‘two minute drill’ are:
Owning Multibagger Stocks which can multiply Investments in Future
Grow your Wealth by Investing in Potential Multibagger Small Caps
Its a fact that 50 small and micro cap stocks out of 90 recommended by our team under Hidden Gems service during last 10 years turned multi-baggers giving more than 100% returns. Stocks like Cera Sanitaryware, Camlin Fine Sciences, Kovai Medical, Wim Plast, Mayur Uniquoter, Roto Pumps etc are our multibagger stocks have given whopping returns in the range of 400% to 2200%.
We do update our members in terms of profit booking / exits depending upon various factors like overall Industry / Sector outlook, fundamentals of the company, management action plan and annual performance in terms of top line, bottom line, operating margins and other important parameters.
Below are some of the Hidden Gems stocks released by us which became multibaggers during last 9 years. Even after severe correction in small caps over last 2 years, as on date returns is in the range of 200% to 2200%. In fact, we already advised partial / full profit booking in many of these stocks in past.
HIDDEN GEMS STOCKS | RELEASE DATE | MULTIBAGGER | OLD REPORT |
---|---|---|---|
1. Camlin Fine Sciences | 27 Mar 2011 | 12-BAGGER | |
2. Wim Plast | 30 Aug 2011 | 5-BAGGER | |
3. Kovai Medical | 27 Oct 2011 | 8-BAGGER | |
4. Cera Sanitaryware | 24 Dec 2011 | 22-BAGGER | |
5. Mayur Uniquoter | 31 Mar 2012 | 5-BAGGER | |
6. Roto Pumps | 05 Aug 2012 | 7-BAGGER | |
7. Acrysil | 25 Nov 2012 | 6-BAGGER | |
8. TCPL Packaging | 31 Mar 2013 | 5-BAGGER | |
9. Rane Brake Lining | 31 May 2014 | 3-BAGGER | |
10. Dynemic Products | 29 Jul 2014 | 5-BAGGER | |
11. Mold-Tek Packaging | 22 Mar 2015 | 4-BAGGER | |
12. Visaka Industries | 05 Jul 2015 | 3-BAGGER | |
13. Chemfab Alkalies | 06 Sep 2015 | 4-BAGGER | |
14. Ultramarine Pi. | 11 Oct 2015 | 3-BAGGER | |
15. Stylam Industries | 08 May 2016 | 3-BAGGER |
BSE Small Cap Index delivered negative returns for 2 consecutive years in 16 years for the first time
Small Caps - Seems Ready to Deliver Big Gains!
If you analyse the bear phase of stock markets cycle since 1990, you will find that such bear phase has not lasted for more than 18 to 24 months. Small cap index which made all time high of 20,184 in Jan 2018 completed its bear phase in March 2020 by making low of 8,873, fall of more than 55% from its peak. Looking at current valuations and expected economic recovery with easing of lockdown, we are confident that small caps will outperform their mid & large cap peers delivering significantly higher returns over next 2 to 3 years.
Greed which was seen in broader market (small & mid caps) in the year 2016 and 2017 turned out to extreme fear and panic due to pandemic. If you do not invest in equities during these opportune times and take the back seat, you will land up making a bigger mistake. In the long run, you do not make decent returns on your investments by following the herd i.e. when everyone is buying stocks; instead you get handsome returns on our investments by investing in stocks at significantly low prices as no one else is buying, and by selling to them when investors come back in herd due to greed in future.
Be a disciplined investor who keep on investing in systematic way irrespective of market conditions and not an emotional investor who usually buy stocks during bull phase when stock prices are moving higher because of greed and sell them in panic during bear phase due to severe fall in stock prices, making mistake of buying high and selling low.
Start building your equity portfolio by making educated investment decisions, subscribe to our Hidden Gems, Value Picks, Wealth-Builder annual subscription services. Avail attractive discounts by subscribing to our combo packs. Below are the details of our annual subscription charges, simply click on SUBSCRIBE! link to subscribe to our services online using debit / credit card or net banking facility.
SARAL GYAN SUBSCRIPTION SERVICE | ANNUAL SUBSCRIPTION PRICE | PAY ONLINE CARD / NET BANKING |
---|---|---|
Hidden Gems | Rs. 10,000 | |
Value Picks | Rs. 6,000 | |
15% @ 90 Days | Rs. 4,000 | |
Wealth-Builder | Rs. 20,000 | |
Combo 1: HG + VP + WB + 15% | Rs. 32,000 | |
Combo 2: HG + VP + 15% | Rs. 16,000 | |
Combo 3: HG + VP | Rs. 14,000 | |
Combo 4: HG + 15% | Rs. 12,000 | |
Combo 5: VP + 15% | Rs. 9,000 |
In case if you are not comfortable in subscribing online, you can make the payment through cheque / cash deposit / NEFT transfer in any of our bank and writing back to us sharing transaction details. Click here for bank details.
Regards,
Also Read: