How to identify Multibagger Stocks for investment?
If you are investing in stocks, you might want to invest to best stocks that multiply money. Stocks that multiply money are Multibagger stocks. Multibagger Stocks terminology is used by stock brokers frequently. However, identifying such Multibagger stocks for medium to long term is a challenging factor. What are Multibagger stocks? How to identify such Multibagger Stocks? Is it possible to multiply money by investing in such Multibagger stocks?.
What are Multibagger stocks?
Stocks that are either in small cap, mid-cap or large cap, but has potential to grow and multiply its share price in few years are Multibagger stocks. Identification of such Multibagger stocks is not that easy. Many investors depend on stock brokers for such Multibagger stock recommendations. Some, depend on SMS tips to invest in such high potential stocks. If Multibagger stocks identification is that simple, than every one would have become Crorepathis in just 1 year. One need to consider several paramaters in indentifying such high growth potential companies for investment. I would touch upon the major ways where you can identify such multi baggar stocks for investment.
Also Read: Which are the Top Performing SIP Mutual Funds to invest in 2016?
How to identify Multibagger Stocks for investment?
Tip # 1 – Debt free / Low Debt companies
Identify companies that are growing at a faster pace and have less debt or zero debt. Debt is external long term liability to the company. If company is growing with its own resources / money at faster pace, it is good sign. If company is growing at the cost of debt i.e. high interest is paid by company for long term or medium term loans, is not that good sign. Interest on such loans would eat away its profits. Hence companies which has debt of < 30% of equity is good for medium to long term investment.
Let us understand this with few examples which has low debt equity ratio. TCS has 1%, Lupin has 9% and Britannia industries has 12% debt equity ratio.
Tip # 2 – Earnings Per Share (EPS) > 30%
Earnings per share (EPS) refers how much earnings the share holders are getting per share. It is computed simply with total profits / no of shares outstanding as on that date of closure of books. If company has earned Rs 1 Lakh profit and shares as on that date is 1 Lakh, EPS is Rs 1. Best way to identify potential stocks are where companies are growing at > 30% of EPS every year.
Let me continue with earlier example and understand this with few examples which has good EPS. In last 5 years, EPS has grown in TCS at 22%, Lupin at 25% and Britannia industries has 46%.
Tip # 3 – Check Operating Performance
How company is doing in terms of revenue, EBITDA and net profits? Does company shows consistent revenue growth performance year on year? What profits company is earning and how margins are growing year on year. Is it consistent in comparison with revenue growth? This gives an indication about positive or negative sign about the company. Recent Indigo Airlines IPO is an example of good revenue and margins growth in last few years.
Tip # 4 – What are the sources of revenues?
One should see hidden value of the company. If company business segment is very huge and potential to grow, it is a good bet. Generally investments in such companies would take time to reap benefits.
Earlier, Titan was one of the best example where investors identified under this segment.
Tip # 5 – EPS Growth Vs Stock Price
This is another key factor in identifying Multibagger stock. How EPS and stock price are increasing year on year. If EPS growth is higher than stock price increase, it is a best Multibagger stock for investment.
E.g. if X company EPS is growing consistenly by 30% year on year in last 3 years, however stock price has grown only 20% per year, it is good bet to invest in such companies. Such companies can multiply your money in medium to long term period.
Tip # 6 – Keep an eye on investments and structural changes of the company
Some companies keep investing in innovative products, incur capital expenditure etc., and the benefits would be reapted in subsequent years. Keeping an eye on such investments would help you to invest in such stocks at right time.
One classic example is about Polaris Financial Technology which got split into services (Polaris Consulting & Services) and product business (Intellect Design Arena Ltd). Many investors felt, there is hidden value in Intellect Design Arena as it is a product company. The share price was floating around Rs 150 even 2 months back. Currently trading at Rs 250+ creating good value to investors.
Tip # 7 – Identify stocks that have unique business model
Stocks that are monopoly or duopoly command in particular industry would be the best bet. Since competitors entering into such market is very rare and difficult.
One such example could be Crisil. There are only few players in this segment and difficult for others to join too. Hence it makes good bet for investing in such stocks.
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How to identify Multibagger Stocks for investment
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