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What are multibagger stocks? How to identify them?

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Akshata Kamath
Akshata KamathAug 10, 2022 | 16:51

What are multibagger stocks? How to identify them?

Multi bagger stocks will make you feel good about your investment decisions. (Photo: Getty Images)

An equity stock that gives a return of 100% or more in a relatively short period of time is called a multibagger stock. These are not a specific category of readymade stocks but are stocks that are undervalued, which can grow exponentially and are only spotted in the hindsight. Stocks that belong to high-growth industries and are listed in emerging economies like India have a higher chance of being a multibagger stock.  

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If a stock gives you 200% returns, it's called a two-bagger. If you receive 300% returns, it's called a three-bagger and so on.

What's the catch? A multibagger stock can only be spotted in hindsight. These stocks might look volatile or risky in the current stock market environment. There is no standard formula for finding the best multibagger stocks, which is why many companies are prospective multibaggers based on their return potential, market growth, margins, and many other features.   

So how do we find these multi-bagger stocks? When you open a stock screener like say Investing.com, you can opt for filters and select stocks that give: 

  • Return on equity greater than 20%
  • Companies whose price-to-earnings (PE) is lesser than their Industry PE
  • Sales or profit growth of at least 15%
  • Net profit margin greater than 10%

You can look at multiple features in each stock and choose and analyse stocks as per your requirements. Some more things you can check for are:  

1. Debt in the books: Check for the debt component in the company's financials and calculate its debt-equity ratio. Compare this with the industry standard to get a general idea of where this company stands. Ideally, a company's debt shouldn't be more than 30% of its equity. You can also look if the company gives a consistent return on projects.  

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2. Check a company's revenue multiple: Revenue multiples mean the value of a company's equity as compared to its revenue. If the multiple is low, it can come across as a cheap buy whereas if the company's fundamentals are strong, the stock can be looked at as a multibagger. 

3. Calculate/PE check the PE ratio: PE ratio is a figure that tells us whether a stock is expensive to buy or cheap. It's calculated by dividing the share price of a company by earnings per share. When a company has a high PE, its considered generally to be a growth stock, which indicates better future performance. A low PE stock is considered to be a value stock, meaning it trades at a lesser price than it should. 

4. Performance over the previous quarters: Companies that give consistent returns are usually the ones who see steady and faster growth in stock prices.
5. Strong competitive edge:  If the stock of your choice has a strong competitive edge over its competitors in the industry, you can find the reasons behind the edge and probably pick it.  

Once you have a prospective list of companies based on your filters, you can research these stocks and check their valuations. Picking a stock and reading why the stock is trading at that price can help you find new facts about the stock’s fundamentals.

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Which companies have turned into multibagger stocks? 

  1. Khaitan Chemicals and Fertilizers grew by 1023% in the last 3 years. The share price changed from Rs 8.92 on March 5, 2019, to Rs 100 on March 5, 2022. 
  2. India Mart Indiamesh ltd grew by 231% in the last 3 years and the share price changed from Rs 1,323 in July 2019 to Rs 4,390 in August 2022. 
Last updated: August 10, 2022 | 20:29
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