How I'm Using this Correction to Pick the 'Multibaggers of the Decade' - Views on News from Equitymaster

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  • Mar 4, 2020 - How I'm Using this Correction to Pick the 'Multibaggers of the Decade'

How I'm Using this Correction to Pick the 'Multibaggers of the Decade' podcast

Mar 4, 2020

Tanushree Banerjee recommends steps to buy multibagger stocks of the next decade during the market correction.

It will probably be a long time before the 28th of February 2020 gets erased from our memories. In fact, the day could go down in the history of Indian stock markets, as 'yet another Black Friday'.

After all, an 1,100 point correction within few minutes of trade is a rare phenomenon. By the end of the session last Friday, the Sensex lost nearly 1,400 points. And if you consider the whole week, markets shaved off a good 6%.

The Sensex had shed over 6% gains at least five times in the past decade. Most of the instances were in 2009 and one in 2016. But each time, there was a strong bounce back a week later. And it recouped almost all the losses.

Now, I certainly do not wish to predict if there is any such bounce back on the cards this week. The coronavirus crisis could very week keep Indian and global stock markets in the red for several weeks.

Anyone who remembers the SARS crisis of 2003, would know that it took nearly six months for the stock markets to overcome the fear.

But in the meanwhile, how should you, as an investor, tread the coronavirus crisis safely? Is there a way to do that? Can this be a chance to buy some long term multibaggers?

Well, like I always say - NOTHING should change the way you invest. Just follow the steps you always do.

  • Do not pay heed to talking heads who are propagating panic. Or even those who recommend to buy 'coronavirus resistant' stocks for the short term. Such irrational activity could only do more harm to your portfolio.
  • Review your portfolio allocation to see if your overall allocation to stocks is in line with the market valuations after the correction.
  • Take a close look at the stocks you were hoping to buy once the valuations offered more margin of safety. Act on the safest ones.
  • This is what I have been doing in my attempt to use the correction to pick multibaggers of the next decade for StockSelect subscribers.

    Now, the multibagger stocks have some key characteristics.

    These characteristics allow the stocks to have a long runway of superlative returns:

    1. Capital efficiency: The companies able to generate consistently higher returns on their shareholders' equity. The idea is the more profitable the company gets, the more value it will create.
    2. Low leverage: This is extremely important for companies to tide over periods of tight liquidity and high interest rates.
    3. Profitability with low capex: Companies which have already done the hard work of building plants and machinery for future growth are in a ripe phase to benefit from their efforts.
    4. But the last and most important is..Scope for PE expansion: Stocks with low PE multiples tend to have a huge room for PE expansion if the business and management went in the right direction.

    If I must pick just one characteristic or ingredient that has been the key catalyst of these multibagger stocks, it would be their PE expansion. Larger the PE expansion higher has been the quantum of returns for the top multbaggers.

    PE Expansion of Companies in BSE A Group
    Data Source: Ace Equity

    The top 100 odd companies which gained up 1000% have had extraordinary fundamentals. But what really made the difference between them and the 10,000% gainers was the quantum of expansion in PE multiples.

    So, I used the sharp correction in the past week to recommend...not one or two but 4 solid safe stocks to my StockSelect subscribers. Each of these stocks have tremendous potential to be multibaggers over the next decade.

    One is a financial entity with deep roots in rural India, other is a tech major making huge strides in cloud storage and the other two are FMCG giants.

    What was common amongst them was the margin of safety in valuations that the recent correction had brought in.

    So, I would recommend that you keep the market panic at bay, continue to look for stocks that have the multibagger characteristics and buy them as and when the market correction offers you the pockets of safety.

    More details on this in my free newsletter The 5 Minute Wrapup. Stay tuned!

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.


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4 Responses to "How I'm Using this Correction to Pick the 'Multibaggers of the Decade'"

ramdas

Mar 21, 2020

I will use the correction to buy grorh oriented stocks

Like 

ramdas

Mar 21, 2020

I am using to buy blue chip stocks

Like 

Chinni krishna

Mar 17, 2020

multibagger

Like 

Gaurav Gaba

Mar 7, 2020

Multibagger stocks

Like (4)
  
Equitymaster requests your view! Post a comment on "How I'm Using this Correction to Pick the 'Multibaggers of the Decade'". Click here!

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