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Thursday, July 15, 2021

How to Identify Stocks with Multibagger Potential?

Important Rules to follow while Picking Multibagger Stocks

Multibagger Small Cap 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.

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.

Peter Lynch 2 Minutes Drill to Shortlist Potential Multibaggers

The key parameters involved in Peter Lynch’s ‘two minute drill’ are:

1. P/E Ratio: avoid stocks with excessively high P/E
2. Debt/Equity Ratio: should be low
3. Net Cash per Share: should be high
4. Dividend & Payout Ratio: should be adequate
5. Inventory levels: lower the better

Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.

Checks specific to Fast Growers:

1. The star product forms a majority of the company’s business.
2. Company’s success in more than one places to prove that expansion will work.
3. Still opportunity for penetration.
4. Stock is selling at its P/E ratio or near the growth rate.
5. Expansion is speeding up Or stable

One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.

A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.

1.The quarterly sales decline for existing stores.
2. New stores opening, though results are disappointing: weakening demand, over supply.
3. High level of attrition at the top level.
4. Company pitching heavily to institutional investors talking about what Peter Lynch calls ‘diversification’.
5. Stock trading at a P/E of 30 or more, when most optimistic estimates of earning growth are lower than 15-20%, thus, unable to justify the high price.

Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!

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.

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.

Wish you happy & safe Investing.

Regards,
Team - Saral Gyan.

Saturday, July 10, 2021

Grab e-book - How to Grow your Savings? for Free

A complete guide to help you ensure, you get the best returns on your investments from equities.

Saral Gyan eBook How to Grow your Savings?This e-book will provide you important & relevant information supported by facts & figures to help you grow your savings by investing in stocks to succeed:

Key Mantra’s:

1. Adopt discipline approach for Savings
2. Find out the ways to get passive income
3. Set your financial goals & start Investing
4. Do invest in equities for long term

Getting the most out of this book is simple, “How to Grow your Savings?” requires practical approach. Execute your learning experience in your day to day life by managing your finances effectively and achieve your long term goals.

eBook - How to Grow your Savings?Traditionally, Indians are Savers. The savings rate is as high as 30 percent. If not a direct savings in the bank, the money goes into a fixed deposit, gold or real estate. That trend might change soon if more people invest in stocks, which have outperformed every other asset class from 2001 to 2007 and later from 2012 to 2017.

Stocks have outperformed other asset classes by as much as 60 percent, yet only 3 percent of Indian population directly invests in stocks.

The main reasons for this is a lack of knowledge, awareness as well as unethical practices by a small minority of participants who encourage regular churning based on tips and rumours without giving proper financial planning to investors.

If someone invested in a State Bank of India fixed deposit account in 2001, he or she would have earned an 8 percent return per year. If the same person invested in State Bank of India stock, he or she would have a total return of 2,525 percent as the stock rose from 20 rupees to high of 525 rupees in 2021 which does not include dividend income over last 20 years which is much higher than the initial stock price.

Though Indians continue to be underinvested in the stock market there is more interest coming in from all corners. The number of active demat accounts in the country jumped by 63 percent in the past 12 months to almost 9 crores in financial year 2021-22. On an average, 26 lakh new demat accounts are opened every month. Recent transparency measures should also bring more people in. The stock market will no longer be treated as a gamble but will be put on par with real estate and gold.

The irony is that even though stock markets as a long term asset class have given the highest returns, short term trading in futures and options has also caused the maximum losses. The maximum numbers of bankruptcies were caused due to the stock market crash in 2008-2009 amongst high risk speculative traders.

Power of Investing in Equity Market

Now, Just Imagine...

How much can you make in 40 years by just investing Rs.10,000 initially in any of financial instruments?

Take a wild guess?

Let us look at the real example.

If you have subscribed for 100 shares of "X" company with a face value of Rs. 100 in 1980.

• In 1981 company declared 1:1 bonus = you have 200 shares
• In 1985 company declared 1:1 bonus = you have 400 shares
• In 1986 company split the share to Rs. 10 = you have 4,000 shares
• In 1987 company declared 1:1 bonus = you have 8,000 shares
• In 1989 company declared 1:1 bonus = you have 16,000 shares
• In 1992 company declared 1:1 bonus = you have 32,000 shares
• In 1995 company declared 1:1 bonus = you have 64,000 shares
• In 1997 company declared 1:2 bonus = you have 1,92,000 shares
• In 1999 company split the share to Rs. 2 = you have 9,60,000 shares
• In 2004 company declared 1:2 bonus = you have 28,80,000 shares
• In 2005 company declared 1:1 bonus = you have 57,60,000 shares
• In 2010 company declared 3:2 bonus = you have 96,00,000 shares
• In 2017 company declared 1:1 bonus = you have 1,92,00,000 shares
• In 2019 company declared 3:1 bonus = you have 2,56,00,000 shares

Today, you have whopping 25.6 million shares of the company.

Any guess about the company?

(Hint: It’s an Indian IT Company)

Any guess about the present valuation of Rs. 10,000 invested in 1980?

The company which has made fortune of millions is "WIPRO" with present valuation of 1,000+ crores (excluding dividend payments) for Rs. 10,000 invested in 1980.

Unbelievable, isn’t it? But it’s a Fact! Investing in companies with good fundamentals and proven track record can give far superior returns compared to any other asset class (real estate, precious metals, bonds etc) in a long run.

Will Wipro provide similar returns in next 40 years? Probably not, it’s already an IT giant.

You need to explore companies in small and mid cap space with good track record and stay invested to create wealth in a long term. 

Let's take another example of little known company - Mayur Uniquoters 

Mayur Uniquoters which we recommended 10 years back is a 9-Bagger stock for our Hidden Gems members. We recommended Buy on Mayur Uniquoter on 31 March 2012 at price of Rs. 56 (adjusted price after 2 bonus issues and stock split in last 7 years, actual recommended price was Rs. 448) and today it’s at Rs. 387 giving absolute returns of 770%. However, we missed to buy it early. You might be surprised to know that Mayur Uniquoter is a 130-Bagger stock for investors who invested in it 13 years back. Investment of Rs. 1 lakh in Mayur Uniquoters in Jan 2009 is valued at more than Rs. 1 Crores and 30 lakhs today. The company has posted strong growth YoY and rewarded share holders in big way, Mayur Uniquoters was trading at Rs. 3 (bonus issues and split adjusted price) with market cap of merely 13 crores in Jan 2009, today market cap of the company is 1,695 crores.

Mayur Uniquoters is still a great value stock considering its consistent performance and leadership position in artificial leather industry and robust demand for its products by esteemed clients from auto and footwear industry.

It is a garden out there and one need to simply provide sufficient time to grow his quality seeds to get the fruits. One has to know what he is doing and has to be cognizant about it. With a little research and patience stock market investments can yield maximum returns.

So, how will you grow your savings? What are you investing in?

Read complete e-book "How to Grow your Savings?", its not only a must read for beginners but also for experienced investors. "How to Grow your Savings" will definitely help you to get an edge over others by understanding the basic of investments and importance of equities in a long run to generate income and create wealth. 

Below are the chapters covered in "How to grow your Savings?"

PART I: VALUE OF MONEY 
  • Inflation
  • Past & Future Value of Money
PART II: INCOME, EXPENDITURES & SAVINGS 
  • Income Expenditure Ratio 
  • Passive Income 
  • Tips & Tricks to Save Money 
  • Saving Strategies
PART III: SAVING & INVESTING 
  • Difference between Saving & Investing
  • Understanding Your Assets
  • Investing in Different Asset class
  • Pay Off Your Debt or Invest
  • Power of Compounding 
  • Benefits of Long Term Investing
  • 10 Key Investing Mantra’s
PART IV: FINANCIAL PLANNING 
  • Financial Planning 
  • Managing your Finances 
  • Making your own Investment Plan 
  • Your Investment Profile & Risk Tolerance
PART V: BUILDING AN EQUITY PORTFOLIO 
  • Investing in Equities
  • Investing in Bull & Bear Market
  • Invest in Individual Stock or Mutual Fund
  • Creating a Stock Portfolio
  • Investment Portfolio Mistakes to Avoid
  • Importance of Stock Diversification
  • Investing for Growth, Yield & Income
  • Facts & Benefits of Investing in Small Companies
PART VI: EQUITIES & RISKS 
  • Investing Risks Vs Rewards
  • Understanding Stock Market Risks
  • Different Type of Investing Risks
  • Managing Investment Risks
  • The Bulls, The Bears & The Farm
PART VII: EQUITIES & THE TIME FACTOR 
  • Stock Investing & The Age Factor
  • Don’t Count on Stocks for Short Term Goals
  • Characteristics of Successful Investors
  • Don’t try to Time Bottom of Stock Market
  • Investing in Stocks for Regular Income & Long Term Growth
  • Investing Checklist – 10 Most Important Element
Saral Gyan eBook How to Grow your Savings?Saral Gyan's 89 pages e-book is priced at Rs. 599. However, we decided to share our e-book for free with our readers to help them understand the power of saving and investing in equities to achieve financial freedom in long run. To receive our e-book, simply click on below link and fill out the form to receive our e-book directly in your inbox.



Do contact us in case of any queries, we will be delighted to assist you.

Wish you happy & safe Investing. 

Regards, 
Team - Saral Gyan

Wednesday, November 11, 2020

How to Calculate CAGR of your Investments?

Dear Reader,

This article will let you know how to calculate the compound annual growth rate, or CAGR, in Excel. You’ll also learn about some of the limitations.

Note: You can download our excel file to calculate CAGR returns, click on download link available at bottom of the article.

Different investments go up or down in value by different amounts over different time periods. Investors need a method of comparing one investment against another, especially if the returns have been volatile, or if investments and withdrawals are at irregular dates.

CAGR is the annual return of an investment assuming it has grown at the same rate every year. It’s a common concept; for example, the one, three and five-year returns on mutual fund fact sheets are CAGR values.

One method of calculating CAGR is given by this equation.

 There are three parameters in this equation.
  • start value of the investment
  • end value of the investment
  • number of years between the start and end value
You can also manipulate this formula to give, for example, the number of years required to grow an initial investment from a start value to an end value, given the growth rate..

Below tables use the above formulas to calculate CAGR.


You can also rearranges the formula so you can calculate the final amount (given the initial amount, CAGR, and number of years) and the number of years (given the initial and final amount, and CAGR).

You can also calculate the Compound Annual Growth Rate using Excel’s XIRR function – check out the screen below for an example.
 

XIRR takes three arguments:
  • The first is a range of cash flows into or out of the investment. Invested amounts are positive, but withdrawals are negative.
  • The second is a range of dates corresponding to the investments or withdrawals,
  • The third is a guess value for the CAGR (XIRR uses Newton-Raphson iteration, so it needs a guess value tostart the iteration).
XIRR is flexible, and can also given you the CAGR given investments and withdrawals at irregular dates. As an example, examine the screen of the Excel spreadsheet.

CAGR has some limitations that investors need to be aware of:
  • CAGR hides volatility by assuming that investments grow at a constant rate. Volatility is an important factor in managing investment risk and can’t be ignored.
  • It’s based on historical data, and can’t be relied on as the only method of predicting future value.
  • CAGR can be manipulated by picking the time period over which it is measured. An unscrupulous fund manager can, for example, choose a start date with an unusually low investment value.
You can download our excel file which contains examples demonstrated in this article and can use the same to find out CAGR of your investments.

CAGR Calculator excel file - Download

Note: You’ll need to enable the Analysis Toolpack to use the XIRR function.

Regards,
Team - Saral Gyan