How to find Multibagger Stocks?

Many people want to multiply their money by investing it in the equity shares. Finding such shares and holding them for long term is a game of patience. Stocks that multiply money are termed as the Multibagger Stocks. This is one of the most challenging task for a value investor as every one tries to find out that Multibagger stocks out of the lot. Either you invest in small cap, medium cap or large cap if it has the potential to grow multi fold in few years, it is called as a Multibagger Stocks. But as we all know finding such share is not that simple; it requires lot of work to find out that share and then sticking with it so you can get the fruitful result of it.

Many investors rely on recommendations of stock brokers and many rely on some random SMS tips. If finding a Multibagger Stock would be such simple then I would say many people would be rich and wealthy but that’s not the case. For finding Multibagger stock you need to work hard as it will test you not that stock broker or SMS sender.

Now, lets see what what is the first question that comes up in the mind of an individual investor like us: ‘How I can find Multibagger Stock’. The person is not even able to figure out as to what all are the things that he may need to keep in mind so he can find good share. In this context, lets have a look on the below points which you must keep in mind while finding your next Multibagger Stock OR the first Multibagger Stock (if you haven’t found any yet):

1.) Low debt or debt free company: Identify the company which is growing at rapid speed with its own funds. Finding such companies is little tough in today’s time as most of the companies have debt and they use it to grow, therefore you can also go with the companies which has low debt and growing at rapid phase. As a company has to pay high interest on the debt borrowed from outside. Its big liability for the company which company has to pay. One can also go with a company which is continuously reducing its debt and repaying its amount regularly. Such company soon will be in low debt or debt free zone which will be directly reflected in there profit afterwards. You must focus on companies which has debt to equity ratio less than 2.

2.) Earnings per share (EPS): Earning per share is referred as total profit of the company on the total outstanding shares as on date of book closure. Lets understand this by an example: If company has earned 1 lakh profit in the following year and the shares as on that date is 1 lakh; then the EPS is 1.

As we all know Earnings are the king of the game. If a company wants to grow then it needs to improve its earnings. Therefore investor’s major focus should be on the growth rate of the EPS. As this determines at what phase company is growing. Always try to invest in the company whose EPS is growing at least 25% annually.

3.) Margins: Investors should always check at what margins company is playing. Two kind of margins are important for an investor i.e., Operating Margin and Net Margin. You must compare them with the other companies in the same sector to evaluate the strength of the company in that particular sector. If company’s margins are on the higher side in the sector then its positive sign. Usually companies with better margins in the sector are able to sustain themselves in the rough time. Always check this factor while evaluating the company as it might be a game changer point.

4.) EPS and stock price growth: Investors should always check how EPS and price of stock are growing. If the EPS is growing faster than the price of stock then there is strong chance for that stock to be a multibagger one.  By evaluating previous 5 years’ EPS and stock price growth one can see what kind of return he/she might get. It is subjective and debatable but it gives basic background about the growth of the company had in last 5 years. These 2 factors play major role in long term strategy. But it needs to be seen with other mentioned factors in this blog. One can evaluate 5 year CAGR by following formula in excel:

Power(final value/initial value,1/n)-1

5.) Growth: If a company has potential to grow rapidly then its always good to put money in such company. If a company can grow its revenue faster then its share price , that also reflects the same. Check the long term growth plans of the company like expansion plan, acquisition plan or comments from company, new product development, new patent filling etc. With this you must also look how company is planning its growth; sometimes for inorganic growth company takes huge debt from market and then it become difficult for them to justify the inorganic growth in long term.

6.) Structural changes in the company: Many struggling companies come up with rescue plans and it might turn the situation other way round for the company. You must analyze this situation like a mature investor as it can be a very risky task. Sometime these type of structural changes work and sometimes not. Even you can’t be sure how much time this change will take to reflect in price. To find out the structural change in any company you must focus on the following points:
a.) Is new investor putting his money into the company to reduce the debt,
b.) Is company selling its non performing assets,
c.) Is company seriously looking for ways to reduce its debt,
d.) Management change into the company

7.) Economic Moat: Investors must focus on the companies which has very good economic moat i.e., how competitively advantageous is the company which makes it tough for other companies to enter into the sector and beat that company. If a company has very good margins in the sector then company can sustain itself in the bad economy time also which is very essential factor for a long term for any company. This ensures that the company has edge over the competition to enjoy good profit margins for long period of time. They can surely use this profit for betterment of company and shareholders.

Apart from these factors I would strongly recommend you to read 5 years’ annual report of the company which gives you better understanding about the company’s future plans, past performance, company’s vision etc. If you want to invest for long term then reading annual report is a must. As the great investor Warren Buffett quotes: