How to find a Multibagger Stock? | Billionaire's Investing Secret

Multibagger stocks are equity stocks that have the potential to give more than 100% return in a shorter period as compared to its peer companies. Usually, these stocks are not in the limelight as they might be recently listed or are not so popular in their respective industry due to their limited operations.

Finding a company that has the potential to scale its business in a shorter period is all it takes to be a millionaire. We have compiled a “Complete Checklist” to find such Multibagger stocks.

*QUALITATIVE ANALYSIS*

1. Business Survival

Invest in business, not in stock, i.e. one should not invest in companies that he cannot understand. It is very crucial for a business to survive in difficult times, no matter whatever the event is. An event can be a health crisis, sudden economic downfall, unfortunate bubble blasts (such as the Dot-com bubble, sub-prime crisis, etc), economic recessions, any political event (such as US-China Trade War, etc).

A company doesn't have to post profits even during difficult times but the primary concern is the survival of a business. For example, FMCG companies would be the least hit even during tough times (such as COVID-19 Pandemic), as they are into the consumer segment and their products meet the daily needs of the consumers.

Earlier there were only FMCG companies but today there are a lot of other businesses that we consume on a day to day basis are food, pharma, chemicals, agriculture, and many more. Try to find out such companies who will be able to sell products or services despite any economic issue. 

2. Sustainable growth potential

The company should be adaptive to changes i.e. they should develop new techniques and focus on product innovation and optimization. The company should have an achievable goal. An investor can find their past performance and various branding strategies used by the company in their recent annual reports (MD&A Section).

3. Management should be visionary

Management are the pillars of any company. A good and experienced group of people can lead a company in the best interest of investors. Pick up any company that has faced financial issues or was dissolved in the past or had a negative market image, all of these issues were only because of fraudulent and incapable management.

Do a thorough background check of the Promoters, Management, Key Managerial Personnel of the company. (You can just google “Mr. X fraud”, and if there are any news related to this would show up)

Besides, management should be ethical and have a good image too.

4. Promoters interest in the company

Usually, a higher promoter stake is always considered a positive sign for the company. A higher stake shows, the promoters are confident about the company’s future and vice versa.

Check out the promoters holding in the last 10 years, and find out the trend, if it is increasing it’s a positive sign and if reducing than it’s a red signal for investors (One should stay away from such companies because if the promoter itself is not sure about the company’s future than how come an investor could have trust in it.)

Promoters pledging should be either zero or minimal.

PS: The above rules do not apply to the Professionally Managed Companies, as such companies have zero or negligent promoter holding. (we will talk about What are professionally managed companies and What are Promoter Managed companies? in detail in our next article so stay tuned and Subscribe us to be updated.)  

*QUANTITATIVE ANALYSIS*

5. Zero Debt Company

Debt is becoming a dirtier word at an individual as well as at the corporate level. A company should have zero or minimal debt, as it would give them an edge over others in terms of minimizing their cost and increasing their returns.

If a company has debt than look at the trend in the last couple of years, and find out the answers to the below questions.

1. Is debt increasing?
2. Is the company’s profitability affected due to debt? 
3. Is the company purposely not repaying debt? 

If the answers to the above question are “YES” than “STAY AWAY FROM SUCH STOCK”

Lower the debt, better the valuations.

6. Increasing Cash Surplus

A company's ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow (FCF).

Analyzing cash flow along with PAT would give you a clear picture of How efficiently the company is able to convert their profits into cash?

7. Equity dilution

Lesser the equity dilution, better will be the valuations.

Management should avoid equity dilution at all times. To improve the liquidity, equity dilution is good sometimes, however it should be only when the proportionate growth is visible.

8. Consistent Dividend

 

A company should be consistent in giving dividends. Why so?

For Example, Company X gives a 5% dividend every year, so in this case, the market sets a benchmark for company X and expects that the company would give more than 5% or at least a 5% dividend in the upcoming Fiscal Year. And if for any reason the company is not able to meet these expectations, it is considered a negative sign by market participants and it is believed that the company is not able to generate sufficient returns.

9. Price to Earning

Low price-earnings multiple indicates the stock is comparatively undervalued with respect to the industry. With the growth in earnings and with every new milestone achievement, PE gets re-rated and then there is usually a multiplier effect on the stock price.

10. Branding

If the company is having its own growing brand then it’s a huge plus point, and even if they don’t own but are associated with some huge brand name which will indirectly increase the goodwill of the company. Read annual reports and news for getting better insights on such brands.

11. Lower the equity capital, EPS growth can be far better

A company doesn’t need to be good only if it has low equity, but low equity capital companies with strong fundamentals have some sure shot advantage over others.

Lower the equity capital, higher the EPS, higher the valuations.

PS: Find companies having equity capital less than 15 crores.

12. Bonus Point

Always choose quality over quantity stocks, as the business will survive only if it serves the purpose of consumers. If you find anything that sounds fishy or you can’t find the answer to your questions in their annual report or on their official website, then you should never invest. No matter how strong the fundamental is.

Disclaimer: The above analysis is for educational purpose only.

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Thanks for reading.

- The Finance Magic

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