Multibagger Stocks

What are Multibagger Stocks?

The term “Multibagger” was coined by prominent investor Peter Lynch. In the famous book “One up on Wallstreet” by Lynch in which he talks about stocks that were capable of generating returns several times their associated cost of acquisition which caught the attention of investors. The Equity stocks that give returns that are several times their cost even sometimes more than 100% of their cost are called Multibaggers. These stocks are essentially undervalued and have very strong fundamentals, thus showcasing themselves as a great investment option. Companies that fall under this category are scalable within a short period and these stocks will be having high demand in the market.

How to Identify Multibagger Stocks?

Multibagger stock is issued by blue-size and small-cap companies which have exceptional growth potential and high production techniques with robust management. However, in certain scenarios, these stocks may have adverse consequences on the economic growth of a country in a long term. Thus, as an investor before investing they should make sure that they are investing in stocks that have positive feedback from financial experts.

There are several factors that you have to consider while identifying multibagger stock, which gives an overview of the stock performance. Let’s take a look-

• PE (Price to Earning) Ratio
• Price to Book Value
• Debt to Equity Ratio
• Debt to Equity Ratio
• Valuation of the stock
• Revenue Generated
• Robust Management

Price to book value (P/B) Ratio:

P/B is the ratio of the market value of the share price over its book value of equity. Before adding any stock to your multibagger stock basket it is very important to know the P/B ratio of the company.
Most investors use the price to book value to find whether a stock is valued properly and also to find that the stock price is trading in line with the book value of the company, which is an effective way to identify whether the stock is undervalued or overvalued and help you to add the right stock into your basket.
If P/B ratio below one, then it is signals to investors that a stock may be undervalued.

Debt to Equity Ratio:

Company's Debt to Equity Ratio is the first recommended parameter to research while identifying multibagger stocks. It gives a clear picture of the risk associated with it by the way the company’s capital structure is set up and run.
Take note that the company’s debt-to-equity ratio will vary as per industry and investors should make Shure before buying any stocks their debt-to-equity should not exceed 0.3.

Source of Earning:

Along with focusing on revenue numbers, always check the sources of revenue from which the company is getting. Also, ensure analysis if the primary revenue segment is set to grow at the macro level and operations of the company are easily scalable or not. If the answer is yes, then the stock may have the potential to add it to your multibagger list.

Valuation of the stock:

Investors may face the difficulty of stock value dipping due to cheap valuation this happens when stock is overvalued. If the stock is undervalued and also the company has robust fundamentals, the investors may get huge benefits by investing in those multibagger stocks.

Robust Management:

Most of the investors while picking up the stock won’t give much importance to the management skills that the company possesses. But we should also be kept in mind that a successful business runs on strong and capable management principles. When picking up the company for the investment you must look at all the associated factors with the company, such as the way they diversified the funds, pledging of shares, the company’s governance practices, board independence, financial matters, and so on. These factors will give a clear idea about whether the company’s management is strong and capable.