How to identify multi-baggers? - Views on News from Equitymaster

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How to identify multi-baggers?

Aug 26, 2011

"You can't buy what is popular and expect to do well" - Nothing better than this quote from legendary investor Warren Buffett provides a concise explanation/answer to the title/question of this story.

Multi-baggers typically never hog the limelight. In fact, they lie in the world of ignorance. Traditional finance theories are not useful in indentifying hidden gems. So, how does one go about finding these potential winners of tomorrow?

Well, we believe the most important factor to identify potential multi-baggers is the ability to take a call on broader macro-themes when the uncertainty factor is at its peak. Classic examples could be: - a) A company engaged in solar power generation b) A company engaged in disposing solid & liquid waste in an eco-friendly manner.

The crux lies in identifying opportunities way ahead of the markets. And this gives us the "price" advantage. Remember, it is price which determines the ultimate return on your investment. Buying at a reasonable price with respect to the growth prospects entails margin of safety - a very important factor especially when it comes to investing in sunrise companies. As the risk-reward ratio is high (chances of the idea materializing as expected is rare due to high uncertainties) buying low brings in a lot of comfort.

Amongst other factors include - patience. Remember, in identifying multi-baggers you are effectively taking a call on a prominent theme that is likely to emerge in future. Non-conducive environment and regulatory hurdles could mean that it would take a while for the theme to emerge.

Take the case of Bharti Airtel for example. In early part of 2000, the company was struggling with losses. The business was capital intensive with high regulatory uncertainties. But what overplayed these concerns was the concept of migration to mobile telephony. And investors who had the ability to foresee such an environmental change were hugely rewarded (India is a populated country and hence the migration phenomenon was pretty much on the cards). However, it may be noted that it took a while before the theme emerged. Hence, patience and belief in ones conviction is of prime importance when it comes to identifying multi-baggers.

Scalability of the business model and management depth/quality also assumes equal weightage. Scalability is critical because an idea needs a free market to prosper. One cannot expect a multi-bagger from power sector where RoEs are capped or from Oil & Gas sector where prices are regulated. Consumption theme fits the criteria of free markets. Take the case of Bharti Airtel, Titan Industries or Pantaloon Retail. They all have been consumption plays in a way.

While it is difficult to gauge management perception examining return ratios gives us a good sense of profitability and also management's intention of maintaining this profitability. Growing businesses with faltering return ratios is not a good symptom. Capital allocation decisions by the management also prove to be a useful sign.

And last but not the least, it is important to note that when the idea emerges, do not get disappointed if the market is highly critical about it. In fact, one should find resonance in the fact that since it lies in the world of ignorance (we just spoke about) you could probably be sailing in the right boat.

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3 Responses to "How to identify multi-baggers?"

rajmalia

Sep 6, 2011

you should identify the proper and perfact stock for
multibagger. and should hold long period.but if u buy
weak stock and hold for long term period-u gain nothing
but will lost entire monies invested.

Like 

Arun

Sep 5, 2011

Sahil,

Holding on to a stock for long term cannot be done without Patience.

Second I bravely agree the author's points,
1. Patience (definitely one cannot see the Infosys, bharti's type of return if he is not patient.) The stock price may go down 50% down, but you be patient sometimes to forsee good return in future.

2. I think you didnt considered the point the author has mentioned that you should look for good management which will probably reduce your risk ratio,

3. Multibagger stocks will definitely be in unknown and uncertainty type. Check out Infosys return from 1995 and you can see the difference of return you are going to get. But you should allocate only a part of your investment say 10 to 15% for multibagger picks.

Thanks
Arun

Like 

sahil

Aug 27, 2011

i think the author seems to be little confused while writing..... think i should look for low risk and high return.....to maximize return.....but author has given example of uncertainty for high risk....so its high risk/high return ....not necessary means ratio is high...ratio shud be low....best is low risk/high return...then high risk/high return....simply keep the ratio low....

then again patience....i dont u need patience to choose multibaggers....it is needed to hold on to a stock.....so while describing the factors for choosing ....u need intelligence and careful selection....rather pateince....

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