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Pick the Best Multibagger Stocks in 2020

The Simplest Way to Find Safe Multibagger Stocks

What if I told you there's a method to easily identify potential multibaggers?

You probably won't believe me.

That's okay. I understand the skepticism.

But it is possible. There is a way.

It's not a guaranteed method. But given enough time,it works.

And more importantly, it's simple to understand.

In fact, the most difficult thing about it is not related to investing per se.

This method works only when you are willing to open your mind to future possibilities, and have patience.

I'll explain with a short history lesson I learned recently from the Collaborative Fund blog.

Let's begin by visualising the following...

Location: USA

Time: Late 18th century (pre-industrialisation)

How did people live?

Back then, neither cities nor railroads were well-developed. Life was local.

Most people didn't travel far. They found work near their town. They built their own homes with locally available materials. They grew their own food near their homes. They sewed their own clothes.

Commerce was conducted face-to-face.

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Then things changed completely. The industrial revolution came along.

Railroads quickly transported people and goods far and wide. Everyone started looking for higher paying jobs. These jobs were in the cities. As people poured in, cities grew vertically to accommodate them.

The US was divided into the thinly populated countryside and the densely populated urban areas.

Today, we take urbanisation for granted. But at that time, it was revolutionary.

However, people soon faced a serious problem. For the first time, they were eating canned food. In other words, they were disconnected from the people producing the food.

The city people soon realised that the food producers were not accountable to them. If the quality of canned food was poor, as it often was, they couldn't do anything about it.

They didn't know what they were eating. They were in constant danger of buying unwholesome food. The middlemen in this business were unscrupulous. The public was uneducated. No one knew who to trust.

A man called William Underwood solved this problem.

His company perfected and sold a type of meat spread. He named it 'Deviled Ham'.

What made his product different from the competition?

First, he ensured that the same quality and quantity of meat went into every can.

Second, he put a fiery red devil logo on every can. He added a tagline: 'Branded with the devil, but fit for gods.'

No matter what part of the country they were in, consumers saw the red devil logo and knew what they were getting. They knew it was a specific product, made by a specific company, under specific quality standards. Thus, people associated the devil logo with quality and consistency.

The logo recreated the familiarity that people were used to because they felt they were buying from someone they knew.

In 1870, the company trademarked the red devil logo. It is the oldest food trademark still in use in the US. It was America's first brand.

Interesting, no doubt, but why the history lesson?

Think of the biggest wealth creators in the stock market either in the US or in India. What do many of them have in common?

That's right. A powerful brand.

In the US, companies with powerful brands like McDonalds, Coca-Cola, Pepsi, Johnson and Johnson, Gillette, and Apple have created unbelievable wealth for shareholders.

Customers trust them implicitly. Whether it's a cheap burger or a very expensive phone, people don't think too much before buying these brands.

This level of trust gives these companies pricing power. To various degrees, they can charge high prices and people will still buy their products.

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Some examples from the Indian markets would be Page Industries, Asian Paints, Nestle, Colgate, Titan, ITC, and Bajaj Corp.

And not all of them are in consumer sectors. Indian companies with strong brand recognition operate in the financial, pharma, auto, and IT sectors as well.

This is the reason long-term shareholders in these companies are rich. Even the world's greatest investor, Warren Buffett, became rich by investing in these kinds of stocks.

If you buy these stocks at the right price and don't sell quickly, you will most likely have a multibagger in your hands. Best of all, these are relatively safe stocks.

It's that simple.

The Most Overlooked Ingredient of a Multibagger Stock

If your investment grows by 25% per annum for ten years, your capital swells to 9.3 times its initial size. That's a fabulous result whichever way you look at it.

Market insiders wistfully refer to those kinds of returns as 'multibaggers'. For many investors, this is the ultimate goal - the holy grail of investing.

So, what does it take for a stock to deliver a scorching appreciation of more than 25% per annum?

We take stocks that make up the BSE 100 index and look at which of them have been able to deliver multibagger returns to investors over the past ten years. Here's what the results look like:

Sr.No. Company Name Stock Price 10 Years Back Current Stock Price 10 Year Change in Price CAGR Return P/E Ratio 10 Years Back P/E Ratio Now
1 Bajaj Finance 32 4,253 13178% 63% 15.2 55.2
2 Eicher Motors 655 22,239 3294% 42% 46.6 29.6
3 Bajaj Finserv 339 9,446 2683% 39% 149.8 424.0
4 Page Industries 874 23,450 2582% 39% 27.7 65.1
5 Britannia Industries 168 3,042 1710% 34% 22.8 54.8
6 Titan Company 71 1,191 1575% 33% 30.2 75.4
7 TVS Motor Company 32 465 1338% 31% 19.0 31.1
8 Pidilite Industries 98 1,398 1331% 30% 16.4 65.8
9 Havells India 52 647 1153% 29% 14.7 53.4
10 Info Edge (India) 221 2,567 1060% 28% 42.0 145.2
11 MRF 6,034 65,536 986% 27% 6.2 26.2
12 IndusInd Bank 142 1,524 973% 27% 19.2 25.4
13 Shree Cement 1,926 20,493 964% 27% 6.8 57.1
14 Asian Paints 180 1,813 909% 26% 25.0 68.1
Data Source: Ace Equity

As you can see, from the hundred stocks that make up the BSE 100 index, only 14 have delivered returns greater than 25% per year.

But here's the point to note: Most investors think that the key to a high-return stock is always earnings growth, so that is what they focus on when they look for holy-grail stocks. Now, that may be true in our results too, but it is far from the complete story...

A careful look at the table above reveals that all of these stocks, barring one, have another important factor in common - a large increase in their price to earnings (PE) ratio.

But how most of these high-return stocks have seen their PE ratios go up offers a valuable lesson for investors.

Many 'growth stock' investors are ready and willing to pay almost any price for a stock as long as earnings are expected to grow at a high rate. But as our results show, if you're looking for multibaggers, stocks need two ingredients: high growth rates, yes, but also expanding PE ratios.

And for the latter to work in your favour, the price you pay for the stock is important. Because it is only your purchase price that will determine whether there is enough scope left for a PE expansion to take place.

So be sure not to overlook this important factor while searching for the next multibagger stock.

Multibagger stocks also have some qualitative rules. A company that satisfies these rules has much higher potential to become a multibagger.

The rules are:

  1. Capital efficiency

    The first rule seeks to identify companies able to generate consistently higher returns on their shareholders' equity going forward. The idea is the more profitable the company gets, the more value it will create.

  2. Low leverage

    The second rule seeks companies with minimal debt. The idea here is to look for businesses consistently reducing their external loans and borrowings.

  3. Profitable with low capex scheduled

    The third rule looks for companies that have already done the hard work of building plants and machinery for future growth. They are now in a ripe phase to benefit from their efforts.

A Personal Multibagger Buffett Has Rarely Talked About

It's fun to hear Buffett talk about investing.

His talks are filled with homespun analogies and generous doses of wit. But here's the thing...even when talking about some of Berkshire Hathaway's biggest investments, say Coke or Gillette, he hardly ever gets into the details of his analysis.

It's mostly the same 'fun to hear' kind of talking.

So today, let me break into a personal investment Buffett made for himself, and give you the juice on the nitty-gritties of his analysis.

The story of this investment takes us to Buffett's home state of Nebraska in Midwestern United States. During the eight years leading up to 1981, led by the popular belief that inflation was going out of control,farm prices in this region exploded. This, coupled with the lax lending policies of small banks in those areas, meant that many fell head-over-heels for farmland.

Like many before, and many more to come, the situation turned out to be a classic bubble. When it burst, prices of farmland crashed more than 50%. Both leveraged farmers and their complacent lenders were devastated. Five times the number of local banks failed in the aftermath as did in the 2008 credit crisis.

But what Buffett saw was opportunity.

In 1986, a 400-acre farm close to Omaha was selling for US$280,000. This was far less than what a failed bank had loaned against that farm just a few years back.

Now Buffett didn't know anything about operating a farm. But it was common knowledge that these areas of the US are great for growing corn and soybeans. So he found out from his son (who loves farming) just how much of these crops a farm of that size could produce and the operating expenses involved. He calculated that the annual profits the farm could produce to be about 10% of the US$280,000 cost of the farm.

Further, as farming methods improve and crop varieties undergo changes, farm productivity typically goes up over time.

Buffett thought it likely that this would happen on this farm too. And of course, crop prices too move up over the long term. It was a no brainer: That 10% annual profit yield on his cost price would go up over time.

Buffett bought the farm. He reckoned that there was no downside and potentially a large upside to be had. Now, of course, there would be an occasional bad crop, and corn prices would sometimes be a let-down. But there would be some bumper years as well. And in the interim, if farm prices went lower, it wouldn't make any difference to these calculations of his returns from the farm.

And that was the heart of his analysis.

Fast forward to 2013. That farm now makes three times the annual profit it made when he bought it, and is worth more than five times what Buffett paid for it. This is over and above all the money that the farm spun-out for Buffett every year over this entire period.

Needless to say, a highly successful investment.

What is most instructive about this investment is what Buffett focused on while making his decision.

He focused on the profits the farm would turn in for an owner, and not on what the farm's price would be next week, next month, or next year.

By his own admission, he thought only about what the farm would produce and cared not at all about its daily valuation. 'Games are won by players who focus on the playing field - not by those whose eyes are glued to the scoreboard,' quips Buffett.

Whether farmland, stocks, or anything in between, Buffett does his analysis exactly the same way. He focuses on what matters, and the rest he knows will automatically fall in place.

And if you thought a minute-to-minute update on stock prices was necessary for making successful investments, Buffett has a suggestion for you: 'If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.'

Peter Lynch, one of the most famous and successful fund managers ever coined the word 'multibagger stock' in his widely-read books One Up on Wall Street and Beating the Street. While the term 'multibagger' has become a buzz word, very few investors are able to correctly identify and ride multibaggers. So, what is key to identifying potential multibagger stocks?

How does one pick them at the right time and ride them to their full potential?

How many multibaggers do you really need to achieve the big riches that you desire? Most importantly, are there any stocks right now that could turn out to be multibaggers?

To make things easier for you, dear reader, we have compiled all our knowledge about multibaggers, as well as four proven approaches to picking multibagger stocks in an easy to read free guide .

Reference:

The Simplest Way to Find Safe Multibagger Stocks

The biggest wealth creators in the stock market either in the US or in India have one thing in common. A powerful brand. Kunal reveals a method to easily identify powerful brands that can drive multibagger returns... Read More

A Personal Multibagger Buffett Has Rarely Talked About

If you thought a minute-to-minute update on stock prices was necessary for making successful investments, Buffett has a suggestion for you. Here's a look inside how Warren Buffett does his analysis for his own personal investments... Read More

The Most Overlooked Ingredient of a Multibagger Stock

Multibagger stocks have the potential to grow at an extraordinarily fast pace. However, such stocks are rare to come across. Investors often completely focus on EPS growth while searching for growth stocks. Here's another factor that should never be forgotten... Read More

What is missing in the stocks with 'multibagger pricing'...

Do not be in a hurry to pay multibagger valuations for a stock that fails to offer proof of wealth creation. We have identified a proof that an investor needs to seek while looking out for multibagger stocks... Read More

This is where your next multi-bagger can come from

Do you think it's better to look for multi baggers in sectors that are currently beaten down? Here's the sector that the next potential winner in your portfolio can come from... Read More

The idea that can get you your next multi-bagger

The most important investing lesson from Berkshire's 2014 annual general meeting where Charlie Munger revealed the secret of Berkshire's success in a way that only he can. While the secret may sound oft-repeated, it contains a very valuable lesson... Read More

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