What is Multibagger Stock?
The
term multibagger was given by one of the most famous renowned investor, Peter
Lynch. This term was used by him in his
book “One Up On Wall Street”. He borrowed the term multibagger from the game of
baseball. Lynch tried to relate the concept of a baseball game in the stock
market by naming some stocks as multibaggers. In this article, you will learn the
meaning of multibagger stocks and how to find them.
Meaning of Multibagger Stock
A
multibagger stock is one that gives returns several times higher than the
investment value i.e. 100% or more returns in a short span of time. Such stocks
are undervalued with great fundamentals and possess high growth potential.
Investors who are looking to earn good returns with decent risk appetite try
their hands on multibaggers.
How to Find Multibagger Stocks
Finding
a multibagger stock is not easy. However, the following indicators will help
you identify multibagger stocks in the stock market.
· Performance
History
Most
analysts look at the past performance of the company to understand future
trends. It gives an idea of how the company may perform in the current and
future market conditions. If the firm is performing well despite lower
revenues, it means that a business is performing well and have huge potential
growth in the future.
· Debt
Levels
Before
investing it is important to keep a watch on the debt levels of the company.
There is no benchmark regarding the appropriate debt levels for a company as it
varies from business to business. However, a debt equity ratio not more than
30% for a company should be considered good. In simple words, it means that the
debt levels of the company must be less than 30% of its equity value.
· PE
Ratio
To get
closer to identifying a multibagger stock, it is important to study its current
price-to-earnings (PE) ratio. A PE ratio defines the ratio of its share price
and earnings per share (EPS). Generally, the PE of the multibagger stocks grows
faster than the stock price.
·Policies
of the Company
The
policies that govern a company play a vital role in its growth in the future.
The policies of a company will determine how it will carry out its operations,
management functions, etc. Understanding the policies is also important because
any changes in them will impact the business, management, profitability and
annual financial reports. Hence, before identifying multibagger stocks it is
important to learn the impact of company policies on the stock price and future
growth.
· Source
of Revenue
Checking
the revenue numbers is not enough when you are looking for multibagger stocks.
You must do deep research to learn the source of revenue. A stock can become
multibagger when business revenue is growing at the macro levels and it can scale
up its operations.
· Valuations
Understanding
the valuations is important before purchasing a stock for multibagger returns.
Cheap valuations are always good when you are looking for stocks that can give
multifold returns. A stock that is overvalued can lead to a drop in valuation.
But when a stock is undervalued along with good fundamentals, it may start its
upward journey soon.
· Industry
When
you are looking for multibagger stocks it is wiser to pick stocks from an industry
that can grow substantially in the next 5-10 years. If an industry is expected
to have hurdles and setbacks in the coming future, it will be difficult to find
multibagger stocks from that industry. Thus, pick stocks from an industry that
has a higher potential to grow.
· Competitive
Advantage
When a
business has a competitive advantage, the probability of it turning into a
multibagger is much higher. The competitive advantage helps the business in
capturing higher market share and constantly increasing its revenues along with
profitability. Most of the time companies that are ahead of their competitors
turn into multibaggers.
The
above mentioned are some of the indicators to find multibagger stocks. Investors
can benefit the most from it only if they have the patience to hold such stocks
in the long run. Just a few multibagger stocks can boost the overall returns of
your portfolio but picking them is an art. You can master this art with
constant learning in the stock market.