Tuesday, September 20, 2022

Saral Gyan Nano Champs

We are glad to introduce our new service – Nano Champs (deeply undervalued & undiscovered micro caps) with an objective to achieve 10X returns in a period of 6 years (6Y-10X). Under this service, we will research on micro-sized companies with market capital of less than 100 crores and put our efforts to identify the companies which are not only deeply undervalued (available well below their intrinsic value) but also have potential to grow at a faster pace.

As there is always a higher risk involved while investing in micro caps, we will have a well diversified basket of 10 stocks from different sectors / industries under this service. Based on our past experience, we realized that micro caps have the potential to deliver maximum returns (higher than small caps and much higher compared to mid and large caps). However, as the universe of micro caps is large enough, picking the right companies requires extensive research. Another very important aspect of investing in micro caps is patience, stock prices of micro caps consolidate for longer time period and deliver maximum returns in shortest span of time. Some of our micro caps which we picked when market capital was less than 100 crores have created enormous wealth for our members over last decade.

You will agree that Investment decisions for the long term can’t be taken by timing the market movement. It is important to understand the Industry potential, company’s fundamentals and valuations with a real long term perspective. This service is suitable for those investors who have an investment horizon of more than 5 years, want to see some of their stocks turning out to 5X, 10X, 20X or even 50X to 100X over next 5 to 10 years, and have the courage to digest the negative returns of 40 to 70 percent from top during market crash / bear phase of the market.

NANO CHAMPS SUBSCRIPTION DETAILS:
SUBSCRIPTION:	1 YEAR & 3 YEARS
SUBSCRIPTION PRICE (1 YEAR):	INR 12,000
SUBSCRIPTION PRICE (3 YEARS):	INR 30,000
NO. OF REPORTS:	BI-ANNUALLY (2 PER YEAR)
EACH REPORT CONTAINS:	10 NANO CHAMPS STOCKS UPDATE
ENTRY / EXIT UPDATE:	AD HOC (AS & WHEN THE NEED ARISE)
PROFIT BOOKING:	AS PER THE PROFIT BOOKING STRATEGY
ACCESS TO REPORT & UPDATES:	WILL BE SENT TO REGISTERED EMAIL ID
1ST REPORT SCHEDULE RELEASE	MID OCT 2022

NANO CHAMPS - INVESTMENT HORIZON: 5 YEARS & ABOVE

The time frame over which investors stay invested in a particular asset class is referred to as an investment horizon. Determining the investment horizon is one key decision an investor must take in the investing journey.

Since the equity market is volatile, it is advisable to invest for the medium to long term. In a time frame of 5 years and beyond, even despite the volatility, markets tend to give an above average return. For example, Sensex has given a CAGR of 17% over the past 5 years which means investing for the long term is a gainful strategy.

BSE SMALL CAP INDEX - YEARLY RETURNS
YEAR	1ST JAN START YEAR	1ST JAN NEXT YEAR	RETURN %
2003*	834.59	2481.95	197.4%
2004	2481.95	3505.83	41.3%
2005	3505.83	6027.56	71.9%
2006	6027.56	7004.1	16.2%
2007	7004.1	13703.07	95.6%
2008	13703.07	3810.41	-72.2%
2009	3810.41	8491.73	122.9%
2010	8491.73	9845.05	15.9%
2011	9845.05	5556.48	-43.6%
2012	5556.48	7452.88	34.1%
2013	7452.88	6649.16	-10.8%
2014	6649.16	11225.22	68.8%
2015	11225.22	11940.75	6.4%
2016	11940.75	12190.15	2.1%
2017	12190.15	19279.96	58.2%
2018	19279.96	14766.86	-23.4%
2019	14766.86	13786.69	-6.6%
2020	13786.69	18261.03	32.5%
2021	18261.03	29807.95	63.2%
2022	29807.95	(01 Sep'22) 28789.30	-3.2%
* starting 1st April 2003		Source: BSE

It is often said that a consistent patient investor always wins in the long term. Warren Buffet rightly said that “The stock market is a device for transferring money from the impatient to the patient.”

NANO CHAMPS - EXPECTED RETURNS:

NANO CHAMPS – EXPECTED RETURNS:				BEST CASE SCENARIO
COMPANY NAME	MARKET CAPITAL	INV. AMOUNT	PERIOD (IN YRS)	X TIMES	EST. CAGR	NET RETURNS
XXX1	< 100 CR	10,000	6	10X	47%	100000
XXX2	< 100 CR	10,000	6	10X	47%	100000
XXX3	< 100 CR	10,000	6	10X	47%	100000
XXX4	< 100 CR	10,000	6	10X	47%	100000
XXX5	< 100 CR	10,000	6	10X	47%	100000
XXX6	< 100 CR	10,000	6	10X	47%	100000
XXX7	< 100 CR	10,000	6	10X	47%	100000
XXX8	< 100 CR	10,000	6	10X	47%	100000
XXX9	< 100 CR	10,000	6	10X	47%	100000
XX10	< 100 CR	10,000	6	10X	47%	100000
INV. AMOUNT		1,00,000	ROI:	10X	47%	1000000

As illustrated in the table above, if all 10 Nano Champs stocks deliver 10X returns over period of 6 years (best case scenario), the investment capital will grow by 47% CAGR. If only 4 stocks out of 10 deliver 10X returns, other 3 stocks deliver half of expected returns and remaining 3 stocks deliver 0 returns, investment capital with grow at CAGR of 35% delivering 6X returns.

NANO CHAMPS – EXPECTED RETURNS:				BULL CASE SCENARIO
COMPANY NAME	MARKET CAPITAL	INV. AMOUNT	PERIOD (IN YRS)	X TIMES	EST. CAGR	NET RETURNS
XXX1	< 100 CR	10,000	6	10X	47%	100000
XXX2	< 100 CR	10,000	6	10X	47%	100000
XXX3	< 100 CR	10,000	6	10X	47%	100000
XXX4	< 100 CR	10,000	6	10X	47%	100000
XXX5	< 100 CR	10,000	6	7X	38%	70000
XXX6	< 100 CR	10,000	6	5X	31%	50000
XXX7	< 100 CR	10,000	6	5X	31%	50000
XXX8	< 100 CR	10,000	6	X	0%	10000
XXX9	< 100 CR	10,000	6	X	0%	10000
XX10	< 100 CR	10,000	6	X	0%	10000
INV. AMOUNT		1,00,000	ROI:	6X	35%	600000

Even if we take bear case scenario considering that only 2 out of 10 stocks deliver 10X returns and another 3 stocks deliver half of expected returns and remaining 5 stocks deliver 0 returns, investment capital will be quadrupled (4 times) in period of 6 years achieving CAGR of 26% which is also significantly higher compared to any other asset classes or major indices - Sensex and Nifty.

NANO CHAMPS – EXPECTED RETURNS:				BEAR CASE SCENARIO
COMPANY NAME	MARKET CAPITAL	INV. AMOUNT	PERIOD (IN YRS)	X TIMES	EST. CAGR	NET RETURNS
XXX1	< 100 CR	10,000	6	10X	47%	100000
XXX2	< 100 CR	10,000	6	10X	47%	100000
XXX3	< 100 CR	10,000	6	5X	38%	50000
XXX4	< 100 CR	10,000	6	5X	38%	50000
XXX5	< 100 CR	10,000	6	5X	38%	50000
XXX6	< 100 CR	10,000	6	X	0%	10000
XXX7	< 100 CR	10,000	6	X	0%	10000
XXX8	< 100 CR	10,000	6	X	0%	10000
XXX9	< 100 CR	10,000	6	X	0%	10000
XX10	< 100 CR	10,000	6	X	0%	10000
INV. AMOUNT		1,00,000	ROI:	4X	26%	400000

However, we are confident to achieve CAGR returns of 35% to 45% over a period of 6 years by monitoring performance of these companies and taking corrective measures through entry in new stocks / exit in existing stock and following profit booking strategy.

NANO CHAMPS - PROFIT BOOKING STRATEGY:

PROFIT BOOKING STRATEGY ILLUSTRATION:
NANO CHAMPS	PORTFOLIO ALLOCATN	INITIAL / POST INV. VALUE	ROI	CURRENT VALUE	PROFIT BOOKING	PROFIT BOOKING AMOUNT
STK-01	1.00%	10,000	3X	30,000	30%	9,000
STK-01	0.70%	7,000	5X	35,000	30%	10,500
STK-01	0.40%	4,000	10X	40,000	100%	40,000

As per profit booking strategy, 30% profit has to be booked once a particular Nano Champ stock delivers 3X returns, another 30% profit will be booked once stock turns 5-Bagger and full profit booking can be done once Nano Champ stock delivers 10X returns.

Q: Why profit booking before 10X returns?

A: Mostly, once a stock delivers 3X or say 5X returns over a period of time during market upturn, it also falls by 30 – 60 percent during market downturn. Profit booking strategy not only ensure that you take out your initial investment capital but also give you a cushion to invest in same stock later at lower levels during market / sector down cycle.

Q: Why initial investment allocation is just one percent?

A: As Nano Champs are micro cap companies having less liquidity and high volatility, we suggested 1% allocation in each stock. In fact, just 1% allocation can do wonders in long term. Assuming that your portfolio value is of 10 lakh, you invest 10,000 each (1% of 10 lakh) in all 10 Nano Champs (1 lakh allocation in total 10 stocks) and continue to hold them, now If only 2 Nano Champs stocks turn out to be 50-Bagger stocks in period of 6 to 12 years, it will make up your entire portfolio value (10 lakhs).

NANO CHAMPS - STOCK SELECTION PARAMETERS:

QUALITATIVE PARAMETERS

Quality of Management – able & honest with good integrity

Promoters holding – should not be less than 45%

Pledging of shares by Promoters – should be nil

Demand & supply gap in the Industry – sustainability of business

Growth drivers – scalable business / catalyst in business

QUANTITATIVE PARAMETERS

Cash flows – positive operating cash flows

Leverage – Debt to equity ratio should be less than 1.5

Capacity expansion – Capex and financing through equity / debt

Visibility of future growth – Expected revenue and profitability

Management of Accounts – Any change in accounting policy

VALUATION PARAMETERS

Business valuations should be below its Intrinsic value

Market capital to Revenue / Sales – should be less than 1

Relatively cheap business – compared to peers and overall market

PAST PERFORMANCE (MARKET CAP < 200 CR):

S.NO	COMPANY	RELEASE DATE	MARKET CAP	X-BAGGER (IN 6 YRS)	% CAGR	OLD REPORT
1	CAMLIN FINE	27 MAR11	56 CR	21-BAGGER	66%	DOWNLOAD
2	WIM PLAST	30 AUG11	123 CR	17-BAGGER	60%	DOWNLOAD
3	KOVAI MEDI	27 OCT11	126 CR	13-BAGGER	53%	DOWNLOAD
4	ROTO PUMPS	05 AUG12	32 CR	9-BAGGER	44%	DOWNLOAD
5	ACRYSIL INDIA	25 NOV12	51 CR	8-BAGGER	41%	DOWNLOAD
6	TCPL PACK	31 JAN13	65 CR	11-BAGGER	49%	DOWNLOAD
7	DYNEMIC PRO	29 JUL14	52 CR	6-BAGGER	35%	DOWNLOAD
8	INDO BORAX	10 APR16	100 CR	7-BAGGER	38%	DOWNLOAD
9	STYLAM IND.	08 MAY16	159 CR	13-BAGGER	53%	DOWNLOAD
10	SAHYADRI IND	30 AUG17	166 CR	5-BAGGER	36%	DOWNLOAD

These companies were covered under Hidden Gems service over last 10 years, all above companies market capital was less than 200 crores at the time of recommendation. Over last 7 to 11 years, companies like Acrysil (51 Cr), Camlin Fine Sciences (56 Cr), Kovai Medical (126 Cr), TCPL Packaging (65 Cr), Roto Pumps (32 Cr) etc. have multiplied investment by 20X to 50X.

You can click on the download link to access these reports. Please note that Nano Champs will not cover the stocks which were already covered under Hidden Gems service, so there will not be any over-lapping of stocks. However, there is a possibility that Nano Champs of today may get recommended after couple of years under Hidden Gem service so that our members can either continue holding the stock or may increase the investment allocation from 1 percent to 2-3 percent of portfolio

NANO CHAMPS - FAQS:

FREQUENTLY ASKED QUESTIONS

Q: What is the subscription period of Nano Champs?

A: We offer 1 year and 3 years subscription for Nano Champs service. You need to renew your subscription every year / every 3 years to continue receiving the Nano Champs update.

Q: How many reports will I get under Nano Champs service?

A: You will get 2 detailed reports with coverage of 10 Nano Champs every year. Moreover, you will also receive individual stock specific update in case of any entry of new stock / exit of existing stock or profit booking update as per defined profit booking strategy.

Q: Shall the report covers 10 new stocks in every detailed report?

A: This report will cover 10 Nano Champs stocks and update about these stocks only in next issue. As this report will be released on 6 monthly basis, there may be changes (entry / exit) based on covered companies business developments / change in govt policies / sector tailwinds or headwinds etc

Q: What if a particular stock rice goes down by 30% to 40%?

A: Nano Champs are less liquid stocks, hence we will advise a price range to accumulate them slowly over a period of time. There is a high possibility that a particular stock price rises or fall by 30 to 40 percent in short term, however being a long term investor, you need to simply hold the stock.

Q: What is suggested investment allocation in Nano Champs?

A: As Nano Champs are micro caps, we suggest maximum portfolio allocation of 10 percent in Nano Champs, 1 percent allocation to each Nano Champ stock.

Please write to us at info@saralgyan.in or sales@saralgyan.in in case of any queries.

Regards,

Team - Saral Gyan

Thursday, August 5, 2021

10 Basic Principles Every Investor Should Know

10 Basic Principles of Stock Market Investing!

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, Cera Sanitaryware, Roto Pumps, Rane Brake Linings, Stylam Industries etc have delivered returns in the range of 500% to 6500% over period of 3 to 10 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 decade 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.

Add power to your equity portfolio by investing in best of small and mid cap stocks - Hidden Gems and Value Picks. Its our mission to ensure that you reap the best returns on your investment, our objective is not only to grow your investments at a healthy rate but also to protect your capital during market downturns.

Wish you happy & safe Investing.

Regards,

Team - Saral Gyan

Wednesday, August 4, 2021

6 Important Rules for Picking Multibagger Stocks

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.

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.

Recent episode of stock prices falling liking nine pins 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 132 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

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COMPANY NAME :	CAMLIN FINE SCIENCES
RELEASE DATE :	27 MAR 2011
MAX RETURNS :	3718% (38-BAGGER)
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COMPANY NAME :	MOLD-TEK PACKAGING
RELEASE DATE :	22 MAR 2015
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COMPANY NAME :	VISAKA INDUSTRIES
RELEASE DATE :	05 JUL 2015
MAX RETURNS :	602% (7-BAGGER)
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COMPANY NAME :	INDO BORAX
RELEASE DATE :	10 APR 2016
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RELEASE DATE :	30 NOV 2017
MAX RETURNS :	2270% (24-BAGGER)
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COMPANY NAME :	GLOBUS SPIRITS
RELEASE DATE :	09 SEP 2018
MAX RETURNS :	850% (10-BAGGER)
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COMPANY NAME :	KABRA EXTRUSION
RELEASE DATE :	30 DEC 2018
MAX RETURNS :	685% (8-BAGGER)
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