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How to Find Multibagger Stocks

Multibagger is a term for a stock that multiplies in price.

They are highly sought after. Every investor dreams of owning at least one multibagger.

But do you know what features or common traits these companies have in common?

Well, there is a formula for finding the next multibagger stock for your portfolio.

The first thing which you need to look out for is the company's competitive advantage in its industry.

This is the quality of the business of surviving through perfect storms and emerging stronger.

The second trait is consistent growth in sales and profits. This is important when identifying high return stocks.

If you take a close look at the world's finest businesses, you'll notice they have reported consistent and growing sales and profits over the years.

The third trait is a low marketcap.

Many investors like the safety of investing in large companies. There’s nothing wrong with that. But to find multibaggers you need to for small companies which have a lot of room to grow.

Big companies are well known among investors. But they started from scratch when they were trading at a low share price and a low marketcap.

The fourth trait is low debt.

While screening stocks, an important and obvious metric one should consider is to look at the company's debt. Too much debt can sink a company.

The two ratios to look at here are the debt-to-equity ratio and interest coverage ratio.

The fifth trait to look for is free cash flow.

Free cash flow shows how much actual cash a company has at its disposal. It should be on an investors' 'need to know' list.

The sixth trait to check for is the promoter’s skin in the game.

The level of promoters' shareholding is very important, especially in India where many businesses are family owned.

The shareholding level is an indicator about the confidence of the promoters in the business as well as the strength of leadership control.

And last, we have return ratios, particularly return on equity (ROE).

The ROE tells us how much profit the firm generates for each rupee of its equity. For example, a firm with a ROE of 10% means that they generate a profit of Rs 10 for every Rs 100 of equity.

You can check out multibaggers in the Indian market with Equitymaster’s multibagger stock screener.


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