Multibagger Stocks Meaning
Peter Lynch, the highly respected manager of Fidelity Investments Mutual Fund, coined the word “multibagger stock” in his books One Up on Wall Street and Beating the Street.
The term became very popular amongst investors because Peter Lynch gave practical examples of how companies that we use in the daily life like McDonalds, Dunkin Donut, Walt Disney, Ford Motor Co etc are great investment opportunities and give huge gains to shareholders.
The reference by Peter Lynch was to stocks which can give a return which is several times the investment made in them.
So, a stock which gives a gain of 200% and returns 300% of the investment becomes a 3-bagger. A stock which gives 10 times the investment is called a 10-bagger.
Meaning Of 100-Baggers
The concept of 100-baggers was made popular by Thomas Phelps in his book “100 to 1 In The Stock Market”.
Thomas Phelps referred to stocks which the potential to give 100x the investment made in them. Phelps gave several examples of such stocks and also gave a detailed explanation on the process that should be adopted by investors to find such stocks.
Penny Stocks, Micro-Cap & Small-Cap stocks
Generally, multibagger stocks are to be found in penny, micro and small-cap stocks. The reason for this is simple. These stocks have a smaller market capitalisation and find it easier to double and triple their net worth in a short while.
For, example a stock with a market capitalisation of only Rs. 100 crore can easily grow to a market capitalisation of Rs. 500 crore and give investors a 500% return.
In contrast, large-cap companies will find it very difficult, if not impossible to give multibagger returns to their shareholders.
Examples of multibagger stocks in India
There are several stocks in India which have given 10x and even 100x returns. Most of these stocks belong to the penny and small-cap space.
Caplin Point Laboratories is one example of a stock which has given a 10x return in a short period of time. Caplin Point manufactures pharmaceutical products and exports them to Venezuala and other Latin American countries.
Another example of a multibagger stock is Uniply Industries. The stock has attracted marquee investors like Radhakishan Damani, Ramesh Damani and Vallabh Bhanshali and has given a return of 1400%.
There are several other examples of stocks which have become multibagger and created huge wealth for investors. Stocks like Ajanta Pharma, Alembic Pharma, Mangalam Drugs, Intrasoft Technologies, Lanco Industries (Srikalahasthi Pipes), Shreyas Shipping, Page Industries, Hawkins Cooker, PI Industries etc are examples of such stocks.
How To Find Multibagger Stocks
Generally speaking, one has to hunt for such stocks in the penny, micro and small-cap space. Such stocks have a low market capitalisation which makes it easier for them to grow exponentially.
Moat
One has to find stocks that enjoy a moat from the competition. The moat can be in the form of a technological advantage or a marketing advantage. Basically, the company must be able to fend off competitors from laying stake to the market.
High RoE Companies
It is a common feature of penny and small-cap stocks which are growing fast that they will enjoy high rates of RoE. The RoE must be in excess of 20% to be attractive. The high RoE shows that the Company is growing in a profitable manner and that the growth is not coming at the cost of profits.
It is elementary that if a company does not make profit and instead suffers a loss, it will soon run out of capital and will have to go for liquidation and be wound up.
In fact, several companies in the e-commerce space have chased high growth at the cost of profits. Such a strategy is not sustainable in the long run and has resulted in the closure of these companies.
Examples of such companies are Local Banya, Tiny Owl, Grofers, Hola Chef etc.
Characteristics of multibagger stocks
The following are the salient features that all potential multibagger stocks display
(i) The Company offers a product or a service that is unique or innovative and for which there is a lot of demand and not much competition;
(ii) The size of the opportunity should be huge in relation to the size of the Company;
(iii) The Company should enjoy high profitability which will be reflected in the RoE levels;
(iv) The promoters should be highly committed and able to steer the Company to new heights through hard work and perseverance;
(v) The promoters must have the honesty and integrity to want to share the gains of the Company with the shareholders;
(vi) The Company should have low debt or be debt-free.
