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What Are Multibagger Stocks?
By deconstructing the term, we may determine that multibagger stocks offer multiple returns. A multibagger is a stock whose price increases numerous times after purchase. These may be inexpensive stocks with solid fundamentals that offer several times the investment return. For instance, if a stock multiplies your initial capital by two, it will be referred to as a two-bagger, ten-bagger, etc. Consequently, these stocks are referred to as multibagger stocks.
Typically, multibagger stocks are inexpensive but have solid underlying fundamentals, and this indicates that their worth has the potential to expand dramatically in the future. Although good fundamentals are not a guarantee that a stock will be a multibagger, they serve to restrict the list and raise the likelihood of finding such stocks.
The Fundamental Characteristics of Multibagger Stocks
Low-debt: A multibagger stock is a Zero for a company with little debt. Although the definition of a low-debt corporation varies from industry to industry, a debt ratio of less than 30 percent of equity is considered healthy.
Sources of earnings: Check the revenue streams that contribute the most to the company’s income. If the revenue segment appears to be expanding on a global scale and the operations appear to be easily scalable, the stock may merit a multibagger in the future.
Quarter-to-quarter performance: Monitor the company’s quarterly sales multiples. Low multiples may indicate that the company has substantial upside potential.
Earnings and price multiples: Check the current price-to-earnings and price-to-sales ratios based on the trailing 12-month EPS and revenue. Greater growth in the P/E ratio relative to the stock price is indicative of a potential multibagger.
What Factors Should An Investor Consider When Selecting Multibagger Stocks?
Size of the business: A firm’s size significantly impacts what you might expect from the stock. How large is the company in which you’re interested? Aside from certain products, large corporations do not experience large stock fluctuations because their shares are already relatively stable. Smaller enterprises, which are expanding at a faster rate than their larger counterparts, are expected to make the most significant strides in some areas. You do not purchase MRF stock in order to treble your money in two years. In the near future, the goal of doubling or tripling TCS’s size is monumental.
Healthy Earnings Growth: A shareholder benefits from a company’s profitability. Due to the company’s revenue growth methodology, profitability model, and capital allocation model, a multibagger stock will often have a high growth rate in earnings.
High-Margin Businesses: Another straightforward answer to the question of how to uncover multibagger stocks is to look for businesses with strong margins. Typically, multibaggers command large margins as a result of a lack of competition, a moat, operational efficiency, or their leadership position in their field. In addition, these stocks typically have a stable margin over time and do not fluctuate every quarter or year.
Future Growth Potential: A firm may not be able to generate a profit if it does not offer a comprehensive range of products or services, given the very dynamic nature of the markets in the contemporary global environment. The management of a multi-bagger stock is vocal about its objective and able to articulate the procedures being taken to attain the same, which is one of its defining qualities.
Competitive Advantage: This is one of India’s most effective methods for identifying multibagger stocks. As a business grows, it can remain competitive by providing superior services and goods. Determine if a company has a competitive edge by evaluating its innovativeness. You can do so by examining their patents, R&D activity, and the frequency with which firms develop innovative products and services.
Capability to expand free cash generation: The capability to expand free cash flow creation has been the most crucial characteristic of stocks that have consistently generated double-digit returns over the long term. Typically, multibagger organizations employ internal finances to expand or provide new items. These businesses also tend to have lower debt-to-equity ratios. These businesses typically generate free cash flow (which is computed as cash flow from operations minus the purchase of fixed assets). This cash flow will be used to finance future expansions and dividend payments.
The return ratios ROE and ROCE: Both of these ratios are used to gauge a company’s ability to earn profits efficiently. These are essential metrics that should also be compared to industry peers in order to select the top player. The trajectory of these ratios should be examined to determine whether or not they are improving.
Mispriced opportunities: The business is dramatically undervalued as a result of investor ignorance or staleness.
Why Is It Difficult to Locate Multibagger Stocks?
As stated previously, investors must conduct an extensive study and be patient before purchasing a stock with a large multiple of their initial investment. Most investors lack the patience to hold a stock for an extended period of time. The objective is rapid earnings, which is diametrically opposed to the concept of multi-baggers.
Moreover, investors fail to recognize evident warning indications from their investments. Instead of conducting research, they choose to pursue cheap P/E stocks or listen to internet guidance and ideas.
The majority of investors are similarly eager to collect their earnings. For instance, if their investments double in value, they seek to immediately book profits and quit.
Investors may potentially make mathematical errors. Investing in blue-chip stocks and expecting 10- or 20-bagger returns is overly optimistic. Their potential has already been captured, leaving little room for improvement.
In other words, in order to obtain a multibagger, you must make fair wagers and have the patience to wait for the greater picture to play out.
The Trap of Multibagger Stocks
Risk management for multibagger stocks differs somewhat from other investment strategies. Additionally, it must be assessed at the level of an individual stock and in terms of portfolio risk.
At the individual stock level, your investments must be small so that you can buy a sufficient number of different stocks to have a fair chance of owning a few large winners. These stocks are frequently extremely volatile; therefore, minimal stakes will limit portfolio volatility. You can keep an eye out for common warning indicators associated with the stocks you own, but you must also be prepared for surprises. The only way to accomplish this is to maintain tiny positions.
1. Risk
To take advantage of high-quality stocks and their growth, you must literally be heavily invested.
For example, XYZ stock is currently trading for Rs. 20. You purchase 50, bringing your total investment to a meager Rs. 1000. Now, the stock will reach 200 in twenty-four months. The current value of your investment is Rs. 10,000. However, suppose you purchased 1,000 stocks of XYZ corporation. Then your property would be valued at Rs. 2,00,000!
Obviously, quantity directly affects your results, and greater quantity yields greater profits. However, a high quantity also implies a big risk. If XYZ stock moves to Rs. 10 after you purchase 1,000 shares, the value of your investment is literally cut in half.
2.Time
Time is undoubtedly the most important factor when it comes to multibagger stocks, and it may take several years, if not decades, for stocks to earn returns in excess of one hundredfold. In contrast, a few stocks may become multibaggers in a matter of months.
In this sense, you have no control over the passage of time or when stock will begin to generate returns. You are bound to the stock for many years. You may invest in a possible long-term multibagger, but if the stock fails, all your effort will be wasted.
3. Diversification
Investing in multibaggers can restrict diversity. As your assets are invested in a small number of stocks, you may be unable to limit risk and, more significantly, diversify. This could involve investing solely in stocks and excluding all other securities.
Additionally, you can wager on a single area. Now, this might succeed or fail. However, as long as you are invested here, you forego the potential rewards of other stocks and industries. Multibagger stocks might cage your diversification potential and limit your exposure in this way. According to the golden rule of investing, concentration is a recipe for disaster.
4. Emotions
It is normal to develop an emotional attachment to your portfolio, particularly if you have been invested for a long time.
Occasionally, ego conflicts can overshadow the holdings. Due to this, investors may not be able to recognize warning signs or potential reasons to sell a stock.
In the end, your profits are only real when you book them, i.e., when you sell the stock or leave the position. Exit timing is the most crucial aspect of dealing with any sort of stock in the short or long term. Take the glass production company La Opala RG as an example. From 2011 to 2017, the stock price increased by an astounding 4000% but decreased by more than 50% over the next two years. If investors had sold the stock in 2017, they would have received extraordinary gains.
5. Penny Stocks
In contrast to mid-cap and large-cap stocks, penny stocks provide fertile ground for the construction of a multibagger. They trade at incredibly low costs and are generally undervalued and underrecognized. In other words, a fundamentally sound penny stock has every reason to appreciate substantially. There are numerous instances of the same.
However, it is also vital to realize that very little information is available on penny stocks. Consequently, you might not have any parameters, measurements, or figures to evaluate future and historical performance. Obviously, investing in these stocks could be extremely dangerous and result in severe capital loss.
In the end, the multibagger returns trap is real from a risk, diversification, and time viewpoint. However, does this imply that you should not seek such stocks? Do such investments even make sense?
Best List of Multibagger Stocks to Buy Now
MAS Financials
MAS Financial is a Non-Banking Financial Company that has over 25 years of experience providing retail loan services. With a variety of financing options, the company focuses on meeting the unmet credit needs of lower- and middle-income individuals.
The country’s demographics and development level indicate an enormous unmet demand in the housing finance, car finance, and MSME finance sectors. Companies with years of experience, such as MAS, are anticipated to continue to enjoy a competitive advantage in this industry. As of March 2020, the company served more than 700,000 active consumers in 4438 rural, semi-urban, and urban regions. MAS employs a revenue-sharing model in which it works with regional NBFCs and NBFC-MFIs for the sale of various products and offers them a credit line. This strategy supports the scalability of connections by placing operational and credit expenses on the NBFC partners. This allows the organization to expand its network while maintaining a risk profile that is relatively modest.
Regardless of economic cycles and other external circumstances, MAS has achieved a sustained increase in profitability and substantial returns over the years (23% CAGR over the past decade). Alongside outstanding growth in its AUM over the past 15 years (+24.58% CAGR). At the end of March 2022, the company is well capitalized with a CAR of 26.35% and a healthy interest coverage ratio of 1.63. Approximately 52% of MAS’ AUM is allocated to micro-enterprises, posing a risk of default. Similarly, retail financing has a high yield but is of a riskier character. It could be a multibagger in the future if all factors align and growth persists.
Mishra Dhatu Nigam
Mishra Dhatu Nigam (MIDHANI) was founded in 1973, operating primarily in the Defense, Space, Energy, and Commercial sectors under the Ministry of Defense. In its one-of-a-kind metallurgical plant worldwide, the company produces a variety of superalloys, unique steels, and materials for Defense and other Strategic Sectors for Nuclear, aeronautical, and Space applications. It possesses the technological capacity to produce a vast array of sophisticated metals and alloys under one roof. MIDHANI is attempting to expand into newer categories and subsegments that complement its institutional strengths. Additionally, MIDHANI is attempting to enter new industries, such as Oil & Gas, Mining, Power, Railways, Chemical, and Fertilizer, in order to develop new growth levers.
The company is the sole manufacturer of titanium alloys in India and has a virtual monopoly in its industry. With more than four decades of experience, MIDHANI has established itself as a leading provider. Operating and net profit margins are healthy. It has a high financial risk profile, low gearing, and acceptable debt protection metrics, making it a great multibagger candidate. Despite having a substantial requirement for working capital, the company has enough liquidity.
Major imported raw materials acquired by MIDHANI include Cobalt, Nickel, Molybdenum, and Chromium, which are volatile in nature and pose a threat to the company’s operational performance. In addition, most of MIDHANI’s revenue is generated from work completed under government contracts. A change in government priorities may alter funding decisions or the amount of funding necessary for existing or prospective strategic programs.
The Indian specialty chemicals industry is one of the world’s fastest-growing businesses (second only to China), with an average annual growth of 13% over the past five years, exceeding $25 billion.
Bitfarms (BITF)
Discussing possible multibagger penny stocks would be illegal without mentioning cryptocurrency. It is true that sentiments are low, and Bitcoin’s future is tough to foresee (BTC-USD). In the event of a reversal, however, crypto stocks are capable of delivering multibagger gains.
Over the past year, Bitfarms (NASDAQ: BITF) stock has declined by more than 80%. The stock appears significantly undervalued in light of the excellent company developments. The company’s hashing capacity has climbed by 180 percent in the past four quarters. As of the third quarter of 2022, the organization’s hashing capacity was 4.2EH/s. Bitfarms anticipates capacity expansion in 2023.
Even with the low Bitcoin price, the company’s mining operations have managed to generate positive cash flow. The firm reported a 45% adjusted EBITDA margin for the second quarter of 2022. Once Bitcoin begins to ascend, the EBITDA margin is likely to exceed 60%.
From a financial standpoint, Bitfarms is also in good shape. The corporation reported $46 million in cash as of Q2 2022. In addition, the corporation owned digital assets worth $62 million. Thus, it is possible to continue expanding activities through 2023.
Gujarat Ambuja Exports Limited
The stock rose from INR 166.60 on January 3, 2022, to INR 361.70 on April 22, 2022, a staggering 116 percent increase in less than four months. And at a time when the market has bowed to global pressure, the stock is thriving at INR 289 (after Monday’s 7% decline). Once the market begins to consolidate, the stock is likely to restore its upward momentum.
The company’s yearly EPS growth is robust, and its quarterly sales growth has been consistent for the past two quarters. The corporation has also made profits over the past two years by utilizing its capital resources efficiently. It is once again a corporation with modest debt and no promoter pledge. And it’s no surprise that FII/FPI/institutions have raised their stake in the company. However, the company’s diminishing net earnings (year-over-year) and operating profit margin may be a problem.
Canopy Growth (CGC)
Canopy Growth (CGC) After a correction of roughly 68% so far this year, Canopy Growth (NASDAQ: CGC) stock is one of the best cannabis stocks to consider.
Canopy Growth has announced the formation of a holding company in the United States and the acquisition of Acreage Holdings. Canopy anticipates that the size of the U.S. market will reach $50 billion by 2026.
Germany has recently authorized up to 30 grams of cannabis for purchase, and this could pave the way for further European nations to legalize cannabis for recreational and therapeutic usage. Consequently, the addressable market is substantial, and Canopy Growth is in a position to profit.
CGC stock appears to have reached a bottom. As regulatory headwinds subside, there is the potential for considerable revenue acceleration and profitability improvement.
Hecla Mining (HL)
Hecla Mining (HL) stock price has increased by 25% during the past month. The situation has improved in a setting where precious metals have been under pressure due to the dollar’s strength. As a result of a strong quarterly performance, I anticipate that HL’s stock will continue to trend higher.
Hecla is the largest silver-producing business in the United States. In addition, the corporation possesses gold assets. In the first six months of 2022, gold mining generated 39% of income.
In addition to a solid asset base, Hecla’s low break-even asset is another reason to like the company. The company has consistently generated positive free cash flows, resulting in the substantial financial freedom to pursue expansion and maintain dividends.
With Hecla mining upping its output forecast for 2022, it is expected that the company will report solid quarterly earnings. HL stock merits inclusion on the list of multibagger penny stocks despite the recent rise.
Final Thoughts
Multibagger stocks are excellent investment opportunities for traders/investors. However, prior to making stock, you should get sufficient background information on the companies offering multibagger stocks, as they can be dangerous bets that vary from circumstance to situation. Sustaining these difficult Covid times can be an excellent litmus test for high-risk wagers, and if they do so, rewards may multiply. Above all else, you should be able to identify the proper multibagger stocks to buy and the appropriate valuations to invest in. Additionally, you should not purchase with the notion that multibagger stocks will yield unrealistic returns in a short period of time. Patience is essential. In order to diversify your risk while investing in these stocks, it would be smart to dedicate a portion of your capital to these hazardous bets and the remainder to reliable large-cap stocks.
