How to Identify Multibagger Stocks

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How to Identify Multibagger Stocks

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Wikipedia describes a multibagger stock as the one which gives a return of more than 100%.

The term was introduced into investing by the legendary Peter Lynch in his 1988 best seller, One Up On Wall Street.

Lynch was a baseball fan and he borrowed the idea of a multibagger from baseball where 'bags' or 'bases' that a runner reaches are the measure of the success of a play.

So for example, a ten bagger is a stock which gives returns equal to 10 times the investment. A twenty bagger stock gives a return of 20 times.

Multibaggers in Recent Years

Are there any stocks that have gone up by 10x or more in the year 2020?

The answer is no if you consider revenues of at least Rs 100 crores.

Here are some of the notable multibaggers for 2020 though:

  • Tanla Platforms up 9.7 times
  • Alok Industries up 7.7 times
  • Venus Remedies up 6.7 times

What about the last 3 years? Have there been any 10-baggers during this period?

Yes, Tanla Platforms, the top performer 2020 is also the best performer between 2018 and 2020. Here are the top multibaggers during this period.

  • Tanla Platforms up 16.9 times
  • IOL Chemicals and Pharmaceuticals up 9.5 times
  • HLE Glascoat up 7.5 times

There have been a handful of 10-baggers over the last five year period (2016-2020). Here the best performers.

  • Mangalam Organics up 16.7 times
  • Tanla Platforms up 14.4 times
  • Deepak Nitrite up 12.9 times
  • Dhani Services up 12.8 times
  • HLE Glascoat up 12.4 times

If we extend the time period all the way up to 10 years, then the list will be much bigger.

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The Land of 100-Baggers

So, how about changing the criterion? How about we see whether the last 10 years has produced any 100-baggers?

Yes, you read that right. A 100-bagger is the equivalent of running a 50 km marathon for an individual investor. May be even bigger.

Not many investors can boast of having invested in a 100-bagger. This is because of the fact that such stocks are very rare.

How rare exactly?

Well, the last 10-years have produced only 4 such stocks. Here are the names.

  • Avanti Feeds up 214 times
  • Caplin Point Laboratories 116 times
  • Bharat Rasayan up 113 times
  • Vaibhav Global up 100 times

Finding stocks that have achieved a 10-bagger status or a 100-bagger status is easy.

We live in a time when tremendous data mining speeds are available at our fingertips. All we need to do is enter a few commands and voila, the database spews out names within minutes.

But how do we invest in a future multi bagger stock? How do we find a stock which goes on to be a 5-bagger, a 10-bagger, and in rarest of rare cases, a huge 100-bagger?

As far as the last category is concerned, Thomas Phelps, a late US investor, has written a particularly insightful book on the topic.

Appropriately titled, 100 to 1 in the Stock Market, the book takes the reader through the finer points of zeroing in on a potential 100-bagger.

The Anatomy of a Big Multibagger

Here are some of the key pointers borrowed from a famous investing blog.

  • A potential 100-bagger stock must be small. Sheer size militates against growth.
  • It must be relatively unknown. Popular growth stocks may keep on growing but too often one has to pay for expected growth too many years in advance.
  • It must have a unique product that would do an essential job better, cheaper, and/or faster than before, or provide a new service with prospects of great and long-continued sales increases.
  • It must have a strong, progressive, research-minded management.

We believe Phelps is spot on. A potential 100-bagger may not share all of these attributes.

But it would certainly share most of them.

And Phelps doesn't stop here. He shares the four ways in which a stock can complete the journey to a full 100-bagger status or even a 10-bagger for that matter.

The Fabulous Four

Here they are in no particular order.

1) The stock can move up primarily on account of recovery from extremely depressed prices at the bottom of a bear market.

We believe there was no stronger bear market than what we saw back in 2008. It is not always that the benchmark index cracks by more than 50%, which it did that year.

When some good quality stocks recovered from the depressed prices after the crash, there were multibagger gains in the making.

Here are some of the big winners.

  • VIP Industries up 17 times in 2 years
  • TTK Prestige up 12 times in 2 years
  • Relaxo Footwear up 11 times in 2 years

2) A stock can also be a multibagger if it sells a commodity and due to change in supply-demand ratio for a basic commodity, there is a sharp jump in commodity prices.

GMDC, Hindustan Zinc and SAIL are all examples of these kinds of multibaggers that performed phenomenally well during the commodity price boom that occurred at the start of the 21st century.

Both GMDC and SAIL saw their stock prices go up a massive 28x i.e. a 28-bagger in the five-year period between 2002 and 2007.

Hindustan Zinc on the other hand, did even better, up 46x or in other words a huge 46-bagger in the same period.

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3) The third way in which a stock can go on to become a huge multibagger or a 100-bagger is by greatly leveraging its capital structure in long periods of expanding business and inflation.

We believe that a great example of these kinds of companies would be NBFCs and banks as by their very nature, these entities have to maintain a capital structure that's very leveraged.

Thus, in times of a booming economy and expanding businesses, rightly managed NBFCs and banks can really turn into huge multibaggers.

A stock like a Bajaj Finance is up a massive 80x between 2010 and 2020 mainly due to this.

Although stocks like HDFC Bank and Kotak Mahindra bank are not up as much, their 6-bagger and 9-bagger gains are mainly due to this third rule.

4) The fourth and the last way in which multibaggers or 100-baggers emerge is by re-investing earnings at substantially higher than average rates of return on invested capital.

Titan and Page Industries are fantastic examples of companies of these kind. These companies generated excellent return on invested capital.

They have also been able to deploy capital back in the business due to their high growth rates.

Page Industries is up 20 times in the last 10 years. Titan has been a 9-bagger during the same period.

In Conclusion

these are some of the common characteristics of a potential multi-bagger. We have also seen the different ways in which the stock can multiply in price.

Before we conclude, here's something interesting about discovering a multibagger.

The goal of an investor should be to look for a good investment and not necessarily a multibagger.

This is because you need to have a thorough process for investing that meets all your criteria.

If you go in with the assumption that every stock you invest into will be a multibagger, you will be disappointed. It won't work out that way.

The future is uncertain. Your rationale for buying a stock may change and you will have to watch out for that.

The idea should be to buy a good quality stock of a company, run by an able and honest management team, available at attractive valuations.

Also, even if the growth story remains intact, the price journey may not be all that smooth.

The stock may have a couple of good years followed by a bad year where it may go down as much as 50%.

You need to withstand this rough ride and view it with equanimity. This is what will separate you from the one who gives up mid-way.

Happy Investing!

FAQs on How to Identify Multibagger Stocks

1. How to identify multibagger stocks

To identify multibagger stocks, you need to look for these seven traits among others:

  • A solid competitive advantage
  • Fast sales growth and a high current or future profitability
  • Companies with low marketcap
  • Low or reducing debt level
  • Growing free cash flow
  • Relatively high promoter holding
  • High and possibly increasing Return on Equity (ROE)

2. How do you define Multibagger stocks?

A stock which gives a return of more than 100% is defined as a multibagger stock.

This term was introduced into investing by the legendary Peter Lynch in his 1988 best seller, One Up On Wall Street.

Lynch was a baseball fan and he borrowed the idea of a multibagger from baseball where 'bags' or 'bases' that a runner reaches are the measure of the success of a play.

3. What do the best multibagger stocks have in common?

The best multibagger stocks are those which are consistently growing their profits and sales, have an economic moat and have low debt.

The best multibaggers also have increasing and high return ratios and a good management team.

Do keep in mind that identifying multibagger penny stocks too follows a similar process, but there are additional filters as well.

Here are Links to Some Very Insightful Equitymaster Articles and Videos on Multibagger Stocks

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