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.
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.
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.