Simple & Effective Strategy for Buying Potential Multibagger Stocks

If we stick to basic rules of investing and put our money in fundamentally strong small and mid cap stocks, we will have multibaggers in our portfolio. We have a long list of super-duper multibaggers like Jubilant Foodworks, Page Industries, Aurobindo Pharma, Amara Raja Batteries, Natco Pharma, Cera Sanitaryware, Can Fin Homes, Camlin Fine Sciences, Mayur Uniquoter, Kovai Medical, TCPL Packaging, Roto Pumps etc.

It is obvious that this consistent success is not the result of chance or good luck. Instead, there is a carefully thought out strategy behind it. Below are some of the strategies which an investor needs to always follow for buying winning stocks which can deliver multibagger returns.

1. First identify the sectors doing well and then the best stocks in it:

There are two well-known strategies for buying stocks – the “top down” approach, in which you focus on the Industry / Sector (e.g. consumer non-discretionary), and the “bottom up” approach, in which you focus on individual stocks (e.g. Page Industries).

We follow a unique method that is a combination of both methods. We buy only the best stocks in the best performing sectors. Applying this method in past, we have avoided investing funds in dud sectors like realty and infra even though individual stocks looked very promising.

2. Buy stocks only if the requirements in the check-list are met:

We follows a rigorous process of checks and balances before we trust a stock offers right investment opportunity. These are:

(a) Know the management and its credentials / pedigree

(b) Understand the business model and growth prospects of the company

(c) The company must have positive cash flows

(d) The debt must be low or negligible

(e) The company must have pricing power and not be vulnerable to excessive competition.

3. Focus on information and not on hype:

In times of boom and bust investors tend to carried away by the noise around them. We advice investors to be rigidly focused on tangible information in the form of financial statements. “Never get carried away by the cacophony and hype on Dalal Street”. Its always wise that investors should “identify the nuts and bolts that drive the growth and profitability of the company”.

4. Recognize your mistakes and cut your losses:

This is very important, most investors suffer from “loss aversion” and like to be in denial that they have made a mistake. If they want to raise money, they will sub-consciously sell the stocks where they have a profit but not those where they have a loss.

Considering our own experience where we made mistake by recommending investments in stocks like Firstobject Technologies, Anil Ltd, and Fiberweb. Once we knew that we had committed a blunder, we dispassionately ask our members to cut their losses before they could do further damage to their portfolio.

We are sure that by following our “old-fashioned” style of picking stocks after doing thorough research should help all of us to grow our money by picking some of the potential multibagger stocks in making and become better investors.

How to Pick Multibagger Stocks for Investments?

It is very important to evaluate company using vital parameters before finalizing it as an investment candidate. Many investors who are new to stock markets simply look at share price, its 52 week high & low and put their hard earned money in equities to work. And as we all know, most of the times this approach never works. Below are the 9 important parameters which are broadly used as tools for doing fundamental analysis of a company. Using these key parameters, Investors can pick winning multibagger stocks for their portfolio to get rewarded in long term.

1. Company’s History & Promoter's Credentials

This is one of the most important factor when one is looking to buy stock in an unknown company. It is best to look up the accounts for a couple of prior years and also read up the directors’ report. One should also do a Google search on the company and its promoters to see if they have ever been involved in shady or dubious deals.

2. Cash Flow

Cash flow is the amount of money coming in or going out of the business in a given period of time, say, one financial year. It helps to determine how much liquidity the company has. If a company is “cash flow positive”, it means that it is generating more cash from the business than it is paying out. This is a positive sign because it means the company has bargaining power. It is selling to its customers and receiving payment early while it is buying from the suppliers and paying them late.

If a company is “cash flow negative”, it is a dangerous sign because it means that the company has no liquidity and is desperately dependent on its suppliers and creditors. They can hold the company to ransom by choking its credit limits.

3. EBITDA 

EBITDA stands for “Earnings before interest, taxes, depreciation and amortization”. EBITDA tells the investor, the profit that the company is making from its operations. If the EBITDA is negative, then it is a very negative sign because it means that the company is losing money in its core profitability.

The EBITDA margin is computed as a percentage of sales and EBITDA. For instance, in a company had sales of Rs. 100 and an EBITDA of Rs. 12, its EBITDA margin would be 12%. The higher the margin, the better it is.

Example: Hawkins Cookers’ EBITDA in the year ended 31.3.2019 was Rs. 90.33 crores. Its sales were Rs. 652.84 crores and so the EBITDA to Sales margin was 13.84%.

4. EPS (Earning Per Share)

EPS (Earning Per Share) = Net Profit / Number of Outstanding Shares

There are variants such as the “Diluted EPS” which means that even the shares that will be issued in the future pursuant to outstanding warrants or bonds are also considered.

Example: Hawkins Cookers’ net profit for the year ended 31.3.2019 was Rs. 54.22 crores. The number of equity shares were 52.88 lakhs and so the EPS for last financial year was Rs. 102.53.

“Cash EPS” is worked out by taking the operating cash profits (without reducing non-cash expenditure such as depreciation).

5. P/E Ratio

The Price-Earnings (PE) Ratio is a valuation ratio of the company’s current share price compared to its earnings per share (EPS). In other words, how of a multiple of the EPS is one paying to buy the stock.

This criteria helps to identify, how cheap or expensive a stock is compared to its peers. It is calculated with the formula: 

Market Value per Share / Earnings Per Share (EPS)

For example, if the stock is available at Rs. 20 each and the EPS is Rs.5, the PE ratio is 20/5 = 4.

The PE is usually calculated on the EPS of the previous 12 months (the “trailing twelve months” (TTM).

The PE ratio can be used to benchmark companies within the same Industry or sector. For example, if one is comparing two PSU banks, if one has a PE of 5 and the other has a PE of 8, the question is why one is paying a premium for the second one and whether there is a valuation aberration somewhere that an investor can take advantage of.

Example: Hawkins Cooker’s EPS in the year ended 31.3.2019 was Rs. 102.53 (as calculated above). The market price per share as on 31st March 2019 was Rs. 3011 and so the PE ratio on 31st March was 29.7.

6. Return on Equity (ROE)

ROE or Return on Equity indicates how efficiently the management is able to get a return from the shareholders’ equity. ROE is calculated with the following formula:

Net Income / Shareholders’ Equity

Example: Suppose a company earned Rs. 1,000 in profit and the total equity capital is Rs. 2000. The ROE is 1000/2000 = 50%.

Suppose another company in the same sector/ industry earned a ROE of 30%. You know which company is a more efficient utilizer of capital.

A variation of the same concept is the Return on Net Worth of RONW in which we take in not only the equity capital but also the retained earnings (reserves).

7. Debt Equity Ratio

Debt Equity Ratio is the proportion of debt to equity used to run the company’s operations. It is calculated with the following formula:

Total liabilities / equity share capital + reserves

When examining the health of your business, it's critical to take a long, hard look at company's debt-to-equity ratio. If Debt Equity ratios are increasing, meaning there's more debt in relation to equity, Company is being financed by creditors rather than by internal positive cash flow, which may be a dangerous trend.

The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as capital goods, auto manufacturing tend to have a debt/equity ratio above 2, while IT companies / Consumer Goods companies with high brand equity have a debt/equity of under 0.5.

8. Market Capitalisation

It is the value for the entire company can be bought on the stock market. It is derived by multiplying the total number of equity shares by the market price of each share.

This helps to determine whether the stock is undervalued or not. For instance, if a stock with a consistent profit of Rs. 100 is available at a market cap of Rs. 200 is undervalued in comparison to another stock with a similar profit but with a market cap of Rs. 500.

Example: Hawkins Cooker’s has issued 52.88 lakh shares. The price per share as on 31st March 2019 was Rs. 3011 and so the market cap of the company on that date was Rs. 1592 crores. This means, theoretically, that if you had Rs. 1592 crores, you could buy all the shares of Hawkins Cooker.

9. Dividend Yield

‘Dividend Yield’ is a financial ratio that shows how much the company pays out in dividends each year relative to its share price. It is calculated by the following formula:

Interim + Annual Dividends in the year/Price per share x 100

If you find that company is paying consistent dividend year after year with dividend yield of above 7%, you can think to invest in such stocks instead of blocking your money in fixed deposits. Here, you can think of some appreciation in stock price along with 7% returns on yearly basis through dividend payment. 

Example: Hawkins declared a dividend of 700% (Rs. 70 per share). Because its market price as on 31st March 2019 was Rs. 3011, the dividend yield on 31st March was 70/3011×100 = 2.32%.

Do you know, Hawkins has multiplied investment by almost 85 times in last 14 years. Rs 1 lakh invested in Hawkins on 1st Jan 2005 is worth Rs. 89 lacs as on 31st March 2019, that too excluding dividends received by Investors. Hawkins share price was Rs. 33.50 on 1st Jan 2005 and Hawkins share price on 31st March 2019 was Rs. 3011 giving astonishing returns of 8888% to investors with CAGR of nearly 40% in last 14 years. Moreover, dividend payout of Rs. 70 is more than double the stock price of Hawkins in Jan 2005.

Dear Reader,

In the stock market there is no rule without an exception, there are some principles that are tough to dispute. Here are 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know while investing in equities.

1. Ride the winners not the losers

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner - The theory is that much of your overall success will be due to a small number of stocks in your portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser - There is no guarantee that a stock will bounce back after a decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well, as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2. Avoid chasing hot tips

Whether the tip comes from your brother, your cousin, your neighbour or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; get into the basics by doing research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out but they will never make you an informed investor, which is what you need to be to be successful in the long run. Find out what you should pay attention to - and what you should ignore.

3. Don't sweat on the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few bucks difference you might save from using a limit versus market order.

Active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.  

5. Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0 or a Rs. 75 stock that does the same, either way you've lost 100% of your initial investment. A lousy Rs. 5 company has just as much downside risk as a lousy Rs. 75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with one of the stock he bought demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought it as stock price already went up twenty fold. But I checked the fundamentals, realized that company was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a long-term perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Small Cap Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains. We have already experienced the multibagger returns from lesser known companies recommended under Hidden Gems service in past, our stock picks like Camlin Fine Sciences, TCPL Packaging, Kovai Medical, Wim Plast, Acrysil, Mayur Uniquoters, Balaji Amines, Rane Brake Linings etc have delivered returns in the range of 500% to 1800% over period of 2 to 5 years.

10. Don't miss to diversify your equity portfolio

Its always wise to have stocks from different sectors and Industries. Do not expose your self to many stocks from the same sector. Be it IT, Consumers, Finance, Infrastructure, Pharmaceutical or any other sector, you must have a proper mix of all with suitable allocation based on future outlook of that sector and industry. Most of the companies from capital goods and Infrastructure sector have not performed since last 6 to 7 years but private banking stocks, NBFCs, consumers and automobile companies stocks are making new all time highs. Hence, its important to stay diversified with your stock investments.

Wish you happy & safe Investing!

Regards,
Team - Saral Gyan.

Many a times people keep searching for penny stocks to buy. Looking for stocks that have lost 90% from their tops and are quoting in single digits.

Just as low-priced food, apparel or cosmetics catch the eye of the price-conscious consumer, penny stocks or scrips that are quoting in single digits cast their spell on the investor. But before an investor has a shy at these penny stocks, it might be well worth his time to ponder over a few points.

Cheap can become cheaper

A stock that has corrected to Rs 10 from Rs 100 could possibly nosedive to Re 1. If you are not sure that at Rs 10, the scrip is undepriced, avoid it. Bad businesses can quote even below the current ‘low’ prices.

Don’t jump to buy one before you probe into the reasons behind such steep falls, for the stock could well test a new low.

Check the face value and valuations

A stock with a face value of Re 1 that quotes at Rs 15 is at the same price of a stock that quotes at Rs 150 with a face value of Rs 10, other things being constant.

The factors such as valuations and business prospects are next checkpoints, before you decide to invest.

Information

Most penny stocks suffer from lack of information. Unlike Nifty stocks, which enjoy adequate coverage by brokers and where most of the information is available in the public domain, there is a lot of uncertainty around penny stocks.

Investors have to be careful while putting money in penny stocks, especially ‘turnaround stories,’ as you may be the last person to know about the ‘story’. No wonder these stocks are viewed as an operator’s paradise. Gullible investors turn out to be the scapegoats as the stock is distributed mostly by the operators.

Liquidity

It is an issue with these counters. This ensures that the price moves in either direction quickly, and a couple of circuits, is ‘business as usual’ for such scrips. In other words, if you realise your ‘mistake’ a bit too late, an exit may not be possible at all, especially if you are stuck with a substantial lot.

Illusion of small: Many think that the penny stocks move quickly to double in price. But this is not the case.

Other things remaining constant, if a company can double its earnings, the stock has the potential to double irrespective of the price level.

Low risk?

Some look at stocks from a ‘low risk’ point of view. When a company sinks, the stock may not remain on the buy list of investors. In the worst case, the price can touch zero.

A stock that was bought at Rs 10 becomes a worthless piece of paper and the investor faces ‘loss of capital’ — the worst that can happen in equity markets.

Put simply, the penny nature of a stock is conducive neither from the risk perspective nor from the reward point of view.

Dear Reader,

Following the crowd in the stock market can lead to disaster if you're not careful. Panic buying or selling can push stock prices beyond reason.

The crowd-following problem seems worse when the markets are down and the mood is pessimistic, people tend to sell even if there is no specific reason to let go of an individual stock.

This common trading mistake costs investors dearly. When the talking heads on television and the wags in print and online begin talk of doom, many investors dump their stocks in favor of cash or other "safe" investments.

Rushing In

As soon as the same crowd gets excited about the market again, the cash investors rush back to the market and buy stocks.

The problem with this approach is that the investor is frightened out of the market when prices are depressed and lured back in when prices have rebounded. In other words, sell low, buy high.

Your best defense against a market that slumps dramatically is to have a well-diversified portfolio that contains an appropriate amount of risk for your financial condition. This alone won't protect you when the whole market dives, however it will position you to ride out the slump and be in good position for when the market rebounds.

The thoughtful investor always asks why the price of a stock is moving before making a decision.

• Has something changed in the company?

• Has something changed in the company's primary market?

• Has there been a negative or positive regulatory or legal change?

• Is there an underlying change in the economy?

These are not all the questions you should ask, some will be specific to the industry or sector, but you get the idea. When you can find nothing in the answers to questions specific to the company, you look to the market.

Is this stock dropping (or rising) because the overall market is moving dramatically in that direction? It can work both ways, although a down market seems to depress overall prices more than an up market raises overall prices.

Shopping at Discounted Price

If you are looking to add to your portfolio, consider a down market a great shopping opportunity. A thoughtful investor is going to buy on the potential of a company and if he or she can pick the stock up at a discount so much the better.

This investing approach takes some courage and confidence in your ability to distinguish between a stock price depressed by a down market and a stock that is fundamentally flawed. You also must be prepared for further declines if the market continues to slide and consider it to add more of our favourite stock picks backed by strong fundamentals and reasonable valuations.

If you have at least three to five years before you will need to begin cashing in your holdings (at or near retirement), you may be able to ride out an extended economic downturn. However, if you do your homework, you'll find bargains in down markets that may reward you handsomely in the future.

Don't be frightened off a stock just because the overall market is sour. If the fundamentals of a company are solid, a down market may be a great time to do some discount shopping. A fundamentally sound company will likely be on the leading edge out of an economic downturn.

These days we can see news are floating on leading business TV channels and newspapers that stock market may repeat history of 2008 going through severe downfall in major indices in coming months. However, we do not agree with such views simply because valuations are not expensive like that of Jan 2008 levels and economic growth will maintain its momentum in coming quarters. Moreover, we expect overall economy to do well in 2nd half of this financial year with better corporate earnings. We continue to suggest our members to avoid timing the markets and look for bargains during ongoing market correction. 

Team - Saral Gyan