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Contact UsImportant Rules to follow while Picking Multibagger 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.
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 liking nine pins in 2019 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 2 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.
Owning Multibagger Stocks which can multiply Investments in Future
The number of small-cap stocks is large and finding a quality stock that can give high returns over a long period is tough even for equity analysts. One reason is that such stocks usually have a short history and are not tracked by many analysts and brokerage houses. Then there are risks such as low liquidity, governance concerns and competition from larger players.
Scores of once small companies have over the years grown big, giving investors a 30-50 percent annual return over 10-15 years and creating fortunes for investors. However, more often than not, we find ourselves at the wrong side of the fence and regret our inability to spot such stocks on time.
Buying Strategy for Small Caps
1. Go for companies with low debt ratio (preferably less than one)
2. A high interest coverage ratio (above 3x) and a high return on equity are big advantages
3. Avoid companies with huge liabilities in the form of foreign currency convertible bonds / external commercial borrowings
4. Look at the quality of the management, its governance standards and how investor-friendly the company is.
5. Mid-cap and small-cap companies can be future market leaders, so be patient with your investments
Those who wish to invest in small-cap stocks should do so only if they have a long investment horizon and tolerance for volatility. Small-cap stocks suffer the steepest falls in a bear market and rise the most in a bull market. An investor should stay invested for at least three-five years to allow their portfolio to gain from at least one bull run. If you are looking for multibaggers, stock must have high growth rates along with expanding PE ratios. The price we pay for the stock is important as it will determine whether there is enough scope left for a PE expansion to take place.
Benefits of Investing in Small Caps
1. Huge growth potential: The first and the most important advantage that a small cap stock gives you is their high growth potential. Since these are small companies they have great scope to rise as opposed to already large companies.
2. Low Valuations: Usually small cap stocks are available at lower valuations compared to mid & large caps. Hence, if you invest in good small cap companies at initial stage and wait for couple of years, you will see price appreciation not only because of growth in top line and bottom line but also due to rerating which happens with increase in market capital of the company.
3. Early Entrance Advantage: Most of the fund house and institutions do not own small caps with low market cap due to less liquidity which make it difficult for them to own sufficient no. of shares. This gives retail investors an opportunity to be an early entrant to accumulate such companies shares. When company grows in market cap by delivering consistent growth and becomes more liquid, entry of fund houses and institutions push the share prices up giving maximum gains to early entrants.
4. Under–Researched: Small cap stocks are often given the least attention by the analysts who are more interested in the large companies. Hence, they are often under - recognized and could be under-priced thus giving the investor the opportunity to benefit from these low prices.
5. Emerging Sectors: In a developing economy where there are several new business models and sectors emerging, the opportunity to pick new leaders can be hugely beneficial. Also the disruptive models in the new age is leading to more churn and faster growth amongst the nimble footed smaller companies.
Concerns while Investing in Small Caps
1. Risk: The first and the most important disadvantage a small cap stock is the high level of risk it exposes an investor to. If a small cap company has the potential to rise quickly, it even has the potential to fall. Owing to its small size, it may not be able to sustain itself thereby leading the investor into great loses. After all, the bigger the company, the harder it is for it to fall.
2. Volatility: Small cap stocks are also more volatile as compared to large cap stocks. This is mainly because they have limited reserves against hard times. Also, it in the event of an economic crisis or any change in the company administration could lead to investors dis-investing thereby leading to a fall in prices.
3. Liquidity: Since investing in small cap stocks is mainly a decision depending upon one’s ability to undertake risk, a small cap stock can often become illiquid. Hence, one should not depend upon them for an important life goal.
4. Lack of information: As opposed to a large cap company, the analysts do not spend enough time studying the small cap companies. Hence, there isn’t enough information available to the investor so that he can study the company and decide about it future prospects.
If these factors scare you but you still want to gain from the upside potential of such stocks, Saral Gyan Hidden Gems & Value Picks is an ideal choice for you. At Saral Gyan, team of equity analysts keep on evaluating small and mid cap stocks to explore the best Hidden Gems and Value Picks of stock market. Saral Gyan - Hidden Gems and Value Picks are the small and mid cap stocks with high probability to become multi-bagger stocks in future and a path for our investors to create wealth through equity investments in a long run. Multibaggers evolve over time. Many successful investors follow plenty of processes to identify these stocks early and continue to ride them till they evolve as multibaggers.
Grow your Wealth by Investing in Potential Multibagger Small Caps
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 11 years. As we made most of these reports public, you can access read / download our research reports by clicking on the Read / Download link:
Below are some of the Hidden Gems stocks released by us which became multibaggers during last 11 years. As we made most of these reports public, you can access read / download our research reports by clicking on the Read / Download link:
| SERVICE NAME | COMPANY NAME | RELEASE DATE | MULTI-BAGGER | OLD REPORT |
|---|---|---|---|---|
| HIDDEN GEMS | SAB TV | 05 Sep 2010 | 10-BAGGER | |
| HIDDEN GEMS | De Nora | 07 Nov 2010 | 5-BAGGER | |
| HIDDEN GEMS | Camlin Fine | 27 Mar 2011 | 27-BAGGER | |
| HIDDEN GEMS | Wim Plast | 30 Aug 2011 | 7-BAGGER | |
| HIDDEN GEMS | Kovai Medical | 27 Oct 2011 | 15-BAGGER | |
| HIDDEN GEMS | Cera Sanitary | 24 Dec 2011 | 35-BAGGER | |
| HIDDEN GEMS | Mayur Uniq. | 31 Mar 2012 | 8-BAGGER | |
| HIDDEN GEMS | Roto Pumps | 05 Aug 2012 | 24-BAGGER | |
| HIDDEN GEMS | Tide Water Oil | 30 Oct 2012 | 5-BAGGER | |
| HIDDEN GEMS | Acrysil | 30 Oct 2012 | 36-BAGGER | |
| HIDDEN GEMS | Bambino Agro | 25 Dec 2012 | 5-BAGGER | |
| HIDDEN GEMS | TCPL Pack | 31 Jan 2013 | 24-BAGGER | |
| HIDDEN GEMS | Balaji Amines | 01 Jan 2014 | 71-BAGGER | |
| HIDDEN GEMS | Rane Brake | 31 May 2014 | 4-BAGGER | |
| HIDDEN GEMS | Gulshan Poly | 29 Jun 2014 | 7-BAGGER | |
| HIDDEN GEMS | Dynemic Prod. | 29 Jul 2014 | 14-BAGGER | |
| HIDDEN GEMS | Acrysil | 28 Dec 2014 | 6-BAGGER | |
| HIDDEN GEMS | Mold-tek Pack. | 22 Mar 2015 | 6-BAGGER | |
| HIDDEN GEMS | Visaka Ind | 05 Jul 2015 | 5-BAGGER | |
| HIDDEN GEMS | Ultramarine | 11 Oct 2015 | 5-BAGGER | |
| HIDDEN GEMS | Indo Borax | 10 Apr 2016 | 5-BAGGER | |
| HIDDEN GEMS | Stylam Ind | 08 May 2016 | 10-BAGGER | |
| HIDDEN GEMS | Shaily Eng. | 29 Jan 2017 | 3-BAGGER | |
| HIDDEN GEMS | Sahyadri Ind | 30 Aug 2017 | 3-BAGGER | |
| HIDDEN GEMS | Dynemic Prod. | 03 Jun 2018 | 4-BAGGER | |
| HIDDEN GEMS | Globus Spirits | 12 Dec 2018 | 7-BAGGER |
We are confident that we will continue to hunt best Hidden Gems from universe of small caps by doing authentic, in-depth and unbiased research work and support our members to make educated investment decision.
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.
We are pleased to inform you that we are celebrating this festive season by offering maximum discounts up to 30% and valuable freebies on our subscription services under Merry Christmas - Happy New Year 2023 offer. Attractive discounts & valuable freebies which make our offer special for our readers are as under:
1. Discount up to 30% on combo pack subscription (valid up to 05 Jan'23 only)
2. Portfolio of 10 Small & Mid Cap Stocks for 2023 (to be released on 1st Jan'23)
3. Special Report - 5 Hidden Gems to Buy / Accumulate (to be released in Jan 2023)
4. Special Report - 5 Value Picks to Buy / Accumulate (to be released in Feb 2023)
5. Existing Portfolio Health Check Up under Wealth-Builder subscription
Below table indicates subscription services and discounted prices valid up to 05 Jan 2023.
2. Portfolio of 10 Small & Mid Cap Stocks for 2023 (to be released on 1st Jan'23)
3. Special Report - 5 Hidden Gems to Buy / Accumulate (to be released in Jan 2023)
4. Special Report - 5 Value Picks to Buy / Accumulate (to be released in Feb 2023)
5. Existing Portfolio Health Check Up under Wealth-Builder subscription
Below table indicates subscription services and discounted prices valid up to 05 Jan 2023.
SARAL GYAN SUBSCRIPTION SERVICE | XMAS - NEW YEAR 2023 OFFER ANNUAL SUBSCRIPTION PRICE | PAY VIA CARD (3% CHARGES EXTRA) |
|---|---|---|
| Hidden Gems | Rs. | |
| Value Picks | Rs. | |
| 15% @ 90 Days | Rs. 5,000 (No Discount) | |
| Wealth-Builder | Rs. | |
| Combo 1: HG + VP + WB + 15% | Rs. | |
| Combo 2: HG + VP + 15% | Rs. | |
| Combo 3: HG + VP | Rs. | |
| Combo 4: HG + 15% | Rs. | |
| Combo 5: VP + 15% | Rs. |
There is no combo option for Nano Champs, you need to opt for this service separately.
Simply choose the subscription service / combo subscription you would like to opt and click on SUBSCRIBE! link in above table to make online payment using your debit / credit card.
Click here to know more about Merry Christmas - Happy New Year Offer.
Do write to us in case of any queries, we will be delighted to assist you.
Wishing you Happy & Safe Investing!
Regards,
Team - Saral Gyan.
