Here Are 12 Ways To Spot A Multibagger Among Thousands of Companies

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horizon of time through compounding gradually and necessitates

Here are 12 ways to spot a a patient investors mindset.
multibagger among The panacea for an investor earning out of a multibagger stock
thousands of companies is when he has put serious capital at work. However, serious
investing happens only when the investor has understood the
by Shashank Khade, 27th June, 2017
company business model, risks to growth, market potential
Investment Advisory thoroughly, has invested at sane entry valuations and is willing
to wait for a business to grow its earnings in the future years.
The moot question remains, is it easy to buy The moot question remains, is it easy to buy into multi-baggers?
If yes, then all of us should have been wealthy by now. Lets try
into multi-baggers? If yes, then all of us should
to address the burning question in the mind of an investor.
have been wealthy by now. Lets try to address
the burning question in the mind of an How do you get multi-baggers? For this, we will need to
investor. understand why do stocks multiply and which type of stocks
become multi-baggers?
There can be different approaches to this quest. We believe the

most common formula for stocks becoming multi-baggers is to
Its natural for the ultra-wealthy to get attracted to Equities identify companies with underlying components, viz. (Consistent
have been widely acknowledged as a vehicle for wealth EPS growth accompanied with free cash flow growth) + (Ample
creation. But, investing in equity stocks have a different cope for PE expansion at the entry valuation of the stock) can
connotation to investors based on the stage of the lifestyle translate into a multi-bagger opportunity
of understanding equity investing.
Stocks which multiply may have some of these underlying
Different types of investors take a dip in the stock markets characteristics:
every day. Some are traders, looking to be smarter than
the market and aspiring to make profits out of short term Growth at attractive price GAAP
trading.
Consistently strong earnings growing company available at an
Trading techniques could include news-based trading, gut- attractive valuation. E.g. Market situation in 2003, 2009, 2013.
based trading, self -developed strategies, quant-based and
driven by chart patterns. Some are medium term investors, Mispriced opportunities
aiming to build capital out of booking profits periodically in
Business is grossly undervalued due to investor ignorance or
stock markets.
being out of flavour. Ex. Some of the consumer stocks in 2007
Few finally graduate to being long-term investors who
understand a particular business and wait patiently for the Change in Investor Communication
company to deliver earnings growth and markets to take
Company which did not communicate regularly has focussed on
cognizance of it. transparency in last few quarters/years. e.g many of the mid cap
Naturally, the term multibagger, would mean differently to stocks
these market participants. To a trader, it may mean high
A chance to participate in a large market potential
annualised returns driven by summation of returns
generated through short-term trades. opportunity at an early stage
Most investors evaluate multibagger stocks with a rear- In a large market opportunity, the company has a first-mover
view mirror approach. They may not try to understand why advantage in a new business which is extremely scalable. Ex.
a stock multiplied and what situations led to such great housing finance.
returns.
Balance sheet transition
In an aspirants mind, generally, multibaggers are
Companies executing high to low leverage transformation,
essentially stocks which can give phenomenal returns in a
working capital cycle reduction, lowering capital intensity in a
shorter time span e.g. Mad rush for IPO stocks expecting
business.
a newly listed stock to provide considerable returns in a
short time span. Turnarounds/Cyclical opportunities
These are looked at as necessary steroids for portfolio Company has undergone severe strain before completing
returns. Some investors look forward to multibaggers as business/financial restructuring and now looking to realign
means to build capital to a respectable level and hence are business & balance sheet correctly. Most investors dislike a
ready to take higher risks in this quest. company which has gone through a rough patch. Risk perception
In other cases, investors invest in equities after a lag of 2- being high such stocks are ignored and available at unassuming
3 years of strong stock market performance and then valuations
aspire to play catch-up. For a long-term investor, it may A market opportunity whose time has come
mean creating sizeable wealth through participation in the
business journey of a company. Company business opportunity becomes ripe for building scale.
We are referring to multibaggers as stocks which
multiply or provide avenues for phenomenal wealth
creation. The wealth creation could happen over a long
2
Multi-bagger opportunities need to be sought in pessimistic

times against the crowd.
Capability to expand free cash generation
The risk-adjusted returns are in investors favour then. In most
Most important feature of sustainable multi-bagger small cap stocks presently, the potential for PE expansion has
stocks has been the ability to generate free cash flows reduced, leaving upside only from EPS growth.
consistently and the ability to grow them. Ex. IT,
Pharma, Cement, Capital goods, consumer product Given this, it is evident that multibagger opportunities are going
companies which have demonstrated a steady be scarce in such situations. Aspirants need to temper their
increase in a free cash flow generation have become returns expectations. It defies logic to take a high risk to capital
large cap stocks. to generate high returns.
One of its kind Investors need to keep their risk allocation low by investing in
companies available at reasonable valuations with an
One of its kind business with strong entry barriers, expectation for moderate returns rather than searching hard for
could lead to unprecedented scarcity premium. the next multi-bagger opportunity.
Change in Management/Focus In a quest for such opportunities, there is no need to risk capital
by investing in a company, with poor business credentials,
Promoters remaining status-quo, next-gen induction backed by unknown management. Neither does too much of
could bring in fresh thinking & positive changes in blue sky thinking needs to be done to buy into futuristic or
business strategy & investor perception. thematic bets.
High ROE/ROI In the present market conditions, investors should not allow
expectations of wealth multiplication to translate into wealth
A business which can demonstrate high ROE/ROI for division.
extended periods is available at attractive valuation due to
negative business/promoter intent perception.
Rising trend in ROE/ROI

A cyclical business changes its characteristics to become
a secular business due to changing business dynamics
and starts to expand its ROE/ROI to healthy levels and
sustains it.
Most important question is when do you seek such

opportunities? Interestingly, most multi-bagger stocks
have provided an adequate margin of safety for investors
at early stages. The highest margin of safety in multi-
baggers is in over pessimistic situations.
Markets being driven by human behaviour swing between

over pessimistic and optimistic market levels. The period
from 2008-09 and 2012-13 have been most recent
examples of over pessimism.
These are times when investors need to be greedy and

seeking multibagger returns. However, being governed by
human psychology normally just the reverse takes place.
In 2013, most investors sought the safety of capital and in

2017 are scouting for multibagger opportunities. Most
investors who invested in 2016 and beyond have been
aspiring for multi-baggers. Why?
Precedence has shown that a large number of small & mid

cap stocks multiplied from Aug13 lows. The BSE Small
Cap index has multiplied 2.75x from 5100 to over 14000
from 2013 until now.
From Nov10 to Aug13, the BSE Smallcap index had more

than halved from 11000 to 5100. Why did the investors not
participate in stocks then?
The fear of capital loss amongst investors with regards to

small cap stocks was the highest then, leading to mispriced
stock valuations across the board by 2013.
The pendulum has swung to the other side now with such
aversion having changed to attraction to small cap stocks.
The market always has cycles in a long-term trend.

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1

horizon of time through compounding gradually and necessitates

There can be different approaches to this quest. We believe the

Multi-bagger opportunities need to be sought in pessimistic

Rising trend in ROE/ROI

Most important question is when do you seek such

Markets being driven by human behaviour swing between

These are times when investors need to be greedy and

In 2013, most investors sought the safety of capital and in

Precedence has shown that a large number of small & mid

From Nov10 to Aug13, the BSE Smallcap index had more

The fear of capital loss amongst investors with regards to

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