Multi-baggers are stocks which grow in times of the traded price. It can be bargained or premium priced in various sizes of tickets. The price is not a major concern while hunting for a multi-bagger. If the fundamentals and the management seem to be promising that’s all what matters to park your money. Being familiar with yearly returns, legendary investors like Peter Lynch, Warren Buffet, have concentrated more on multi baggers especially Lynch usually shoots only for two digit multipliers. Fascinating to see your account grows in higher multiples than visualizing it to grow in percentages. No complex mathematics is involved in picking the moat builders, as famously said by Buffet,
If picking stock involves complex math, I would be flipping burgers and listening to you about making money.Warren says at the AGM.
When it comes to picking certain kind of stocks dividend paying, growth stock, blue chip investment, there will surely be some areas to be stressed to pick the right business. Sure of the way for multiplying prices, there exist some points to be pulled closer for observation.
Look around you:
Peter Lynch’s One Up on Wall Street suggests readers take a leisure walk around your home to see what all are the products you use repetitively and cannot be lived without. These are the inevitable companies which run our life smooth.
- Surf excel (HInd. Unilever) is a detergent surely takes place in the monthly provisional list.
- Nilkamal the classical example of plastic products manufacturer.
- The watch (Titan) you wear has immense influence until smart phones and now for status.
- Television (Sony, Panasonic) which runs all day with no audience.
- Mobile apps (Zomato) which always occupy some space to serve you.
- The footwear (Sree Leathers) you always opt to buy.
The dress you wear, bike you ride, restaurants you eat, FMCG products which you will never fail for a month, the list goes on. After looking into all these brands the real part of choosing lies where most of the growth investors overlook and exit before the tripling or even higher multiples are the fundamentals of the business.
Fundamentals of the business:
The first step is a cake walk the next, compelling to be a harder one. Servicing the debt is a major part of brand building, the company tends to leave out the spendings in the rear in order to flourish as a brand.
- How much ready is the institution regarding interest payments? (Debt/Equity)
- Whether the cash flow is good among the sector? (FCF)
- Does the inventory seem abnormal? (Balance sheet)
- Are the expenses too high to meet the desired profits? (Profit Margin)
Mentioned here are some major areas to look into, adding to this you may well scrutinize the pile of names you have noted.
Price to earnings growth (PEG):
PEG is just PE divided by earnings growth. Price to earnings growth is of paramount because it reflects the growth w.r.t. it’s expensiveness. More explicitly, how much you pay for the growth of the business. Here P/E can be higher, but PEG will come down when the price is justified for its earnings growth.
Let’s assume company A is trading at 100 INR earning 10 INR, the previous year earnings were 8 INR. Same time company B is trading at 120 INR earning 10 INR, the previous year earnings were 5 INR.
Company A: PE is 10, Growth- 25%, PEG 10/25= 0.4
Company B: PE is 12, Growth- 50%, PEG 12/50= 0.24
In the example presented, investors might go with company A because of its cheapness. Nevertheless, company B is growing frenetically, the growth is double that of the former. Even though the stock is expensive comparatively, it justifies the price.
The promoter should hold at least a third of the business, that’s the kind of confidence he/she has in the firm. Hunt for stocks which has no institutional holding, get ahead and accumulate, you might as well know if the retail holding is moving ahead, probably you are late. You can’t be the first to identify the stock, but at least be in before institutions. Financial firms don’t look for cheap tickets, they keep playing in hot stocks and the rules and regulations doesn’t allow them to come up with a new entrant. When the huge players come in, the trade volume is humongous and the price starts to rise with no limits.
Maruti Suzuki is well known for its budget cars were trading at Rs.600 in 2008. Until 2013 the price stayed doubled from 2008 levels. When the stock came under the institution’s and the public’s radar, the price is pushed to near Rs.10,000 in 2018. If you have invested Rs.3000 in 2008, a 16 bagger would have resulted.
To spot an uninterested stock, proceed in search of a boring business. Remember, every stock has an underlying business if the price is low or high that is because of the business’s quality. Businesses like Waste Management, Paper Industry, Carpet manufacturing, etc., are just boring and no one interestingly reads reports of them. Surprisingly, you can find a company which performs well among the boring industry, someday, some manager, sometimes, look for some boring business to make money. Even if you are late in this kind of seeking that’s not even a problem. But avoid hastily made decisions.
Service Corporation International is a company which manages all the proceedings for a funeral from start to the last shovel of mud. The business may not be attractive, but the financials might mesmerize you.
Ensure the company is innovative and solving people’s problems which empowers them to stay in the game. The sales will never drop unless they are not dropping the research department or a rival compels them to shut the business. Pharmaceutical companies have come up with handy medicines, Mobile phone manufacturers with unique features, publishing companies with unique strategies, FMCGs with quick cook packed foods, etcetera., are some of the integral part of choosing a stock.
- Failing to look into the fundamentals when the stock price doubles or triples. The potential might be high for you to achieve great results will be diminished overlooking the numbers.
- Missing out current actions of the business.
- Disregarding the new product sales.
- Ignoring a physical check if its a restaurant, Laundermot, supermarket etc.
- Obsessing price to earnings ratio.
- Over diversifying might kill your gains, because no one can predict all the multi-baggers until it is multiplied. As Lynch says it will lead to “Di-Worse-ification”.
- IPOs will never give you Multi-baggers.
The scope of spotting a multi-bagger doesn’t end with the previous line. If you have a unique style of finding one, let us know in the comments below.