What are Multibagger Stocks?

Peter Lynch coined the word ‘Multibagger’ in his book ‘One Up On Wallstreet.’ It’s not difficult to understand what are multibagger stocks. Multibagger stocks are simple, and it is the stocks that have provided significant returns over a long period. Say a stock gives 2 times returns, then it’s considered a two-bagger.  A stock providing 3 times would be a three-bagger. A stock giving 10 times the returns is considered a ten-bagger stock.

To be a multibagger, a stock has to provide significant returns over a certain time. The period doesn’t have to be fixed, but it needs to be significant enough to provide returns. No stock is considered a multibagger stock till it gives returns. It’s close to impossible to predict the exact returns any stock can provide. Here is a detailed overview of multibagger stock. 

Key Highlights

• Multibagger stocks offer substantial returns, multiplying initial investments several times, such as two-bagger or ten-bagger stocks, with significant long-term gains.

• Examples include Uniply Industries, Caplin Point Laboratories, and KIFS Financial Services, showcasing impressive returns of 1400%, 22,300%, and 207% respectively.

• These companies exhibit advanced R&D, strong growth potential, excellent management, minimal debt, and competitive advantages, contributing to significant returns and market leadership.

• Risks include market volatility, high-risk-high-reward scenarios, speculative nature, management issues, limited historical data, and potential for substantial losses despite high return potential.

Examples Of Multibaggers

Since the beginning of the stock market, many stocks have been showcased to be multibagger, giving enormous returns to investors.  In 2015 Uniply Industries was considered a multibagger as it provided a return of more than 1400 percent within the span of a year.  Caplin Point Laboratories was a multibagger for providing 22,300 percent returns in 10 years. KIFS Financial Services was the biggest multibagger for 2021, providing a 207 percent return as of Jan 2022. AK Spintex, RTCL Daulat Securities, and Sacheta Metals have all provided more than 150 percent returns in the year 2021.

A couple of more multibagger stocks are who provided 100 percent or more returns within a year after 2021 concluded are Triveni Glass, BCL Enterprises, Orosil Smiths, Kellton Tech, Tranway Technologies, Zodiac Energy, Tinna Rubber & Infra, and Ruttonsha International Rectifier.

For the same time period Bhakti Gems, Banas Finance, Citizen Infoline, Gujarat Credit Corp, Katare Spinning Mills, Swiss Military Consumer Goods, IL&FS Engineering and Construction, Polo Queen Industrial and Tine Agro, etc., provided returns of 100 to 95 percent.

What Characteristics Should a Company Possess to Generate Multibagger Shares?

Companies with specific characteristics can achieve manifold profits on investments through multibagger securities. However, there are certain characteristics of such profits. Let’s discuss them in detail.

Advanced Research and Development Skills

Quality sales volumes frequently support a steady increase in income of a stable company. For such a company to achieve this status, it will need to spend big on R & DE. What characterizes such demand is high-demand products that have few substitutes. It also includes multibaggers when considering monopolies or duopolies that use aggressive pricing policies and entry barriers to augment income.

High Growth 

It is important to examine the issuing company’s performance when identifying multibagger stocks. Usually, businesses with a high-profit generation capability and minimal debt are favourable candidates. This is because these stocks offer high earnings per share, improving income on investments. Whereas, companies with low debt-to-equity ratios show strategic financial management. Moreover, the PEG (Price-to-Earnings) growth ratio is high signifying that returns on one unit of a share are more than the initial investment.

Excellent Management Skills

Trained and experienced managers are owned by companies that give out multibagger stocks. It’s important for an uninterrupted process of production and sales chain coordination that there is effective management, which owns such companies. To make sure that the revenue generated is maximum, these companies will engage some analysts to find the best pricing points

Risks Associated With Multibagger Shares

Investing in Multibagger shares provides the possibility for high returns. However, it also comes with significant risks:

1. Market Volatility

These stocks come from the high-growth rate sectors that are usually associated with market fluctuations. Any changes in the economic conditions, industry, or other events can lead to a drastic price fluctuation. This as a result affects the value of the stocks.

2. High Risk-High Reward

Though multibagger stocks can offer high returns, they also come with high risks associated with them. This means they have a potential for large gains but they come with the possibility of losses. 

3. Speculative Nature

A lot of multibagger stocks are risky because they depend on future growth potentials and not a present performance which makes them highly speculative. In situations like this, there are instances where such stocks are overvalued. In case the anticipated future growth does not occur, the stock prices would crash down rapidly.

4. Management and Operational Risks

The effectiveness of Multibagger stocks lies solely on how well the company’s management can translate its vision and strategy into profits. The performance of the company could be hindered due to wrong choices made by managers, lack of smooth-running systems in place, or conflicting interests among employees.

5. Limited Historical Data

Start-ups often sell stocks that can make potential gains. However, there is a possibility that they might not have historical data on the stock. Due to this, it can be tough to predict how well the company will do in the long run.

Why Should You Invest In Multibagger Stocks?

Investing in Multibagger stocks can be highly rewarding, offering several compelling reasons:

1. High Returns on Investment

In due time, these investments could turn out more valuable than the actual amount put into them. Once small investments are made in these, they can increase in value up to very large amounts. This is why many people are attracted to them, especially business-minded individuals.

2. Strong Company Fundamentals

Companies that provide multibagger stocks have strong fundamentals, advanced research and development, innovative products, and a firm footing in the market. They are usually industry leaders thereby maintaining long-term growth and profitability.

3. Portfolio Diversification

Putting multibagger stocks in your investment collection results in a broad-based acquisition, and lowers evenness. Being parts of sectors with good prospects, such stocks balance between well-grounded blue chips and hyper-high return but extremely risky instruments.

4. Long-term Wealth Creation

If you are planning to invest for the long term to become wealthy, the best stocks to buy are the ones that appreciate rapidly. You can invest in multibagger stocks by holding onto these for long periods compounding effect will work on them. Moreover, you will also receive increased gain on them.

5. Capital Appreciation

You can experience evident capital appreciation by investing in multibagger stocks. This is because as companies grow their stock prices increase. This ultimately offers investors substantial gains. 

6. High Earnings Per Share (EPS)

Stocks of companies that are categorized as multibagger are essentially those that tend to generate high earnings per share. When a person invests in these kinds of stocks, they stand to increase dividend yield from such businesses. Whereas, the entire returns on their investments improve due to higher returns on these types of securities.

How To Identify Multibagger Stocks?

Multibaggers are gold mines waiting to be discovered. You need to consider various factors before investing in these stocks. There’s no guarantee that a particular stock will be a multibagger. Here are a few factors you should research before you invest in a multibagger stock.

1. Debt

Debt to equity ratio is something all investors should be aware of. Having huge amounts of debt can be harmful in the long run. One should look at the revenue being generated and try to understand how it’s been changing with time. An increase in returns can indicate that the requirement to take upon debt might reduce. IT advised having a debt-to-equity ratio of 0.3 or lower to avoid being under excess debt

2. Revenue

Looking at revenue is crucial. An exponential growth showcases the probability of more growth in the future. A company whose revenue has been growing shows strong growth potential along with the change of being a multibagger stock

3. PE Ratio

PE Ratio is the ratio of the share price and the earnings per share. Understanding the PE ratio and comparing it to the same sector companies can be quite helpful. Drastic growth in the PE ratio compared to the growth in share price is often considered an indicator for a multibagger stock.

4.  Sector

Picking the right sector to find a multibagger stock is important as well. Certain industries benefit during the development cycle of the economy. An example could be the booming of raw material industries like mining and agriculture during the early development stage of a country. Finding the right company can be difficult, though as new policies are implemented, economic turmoil, or natural calamities that can change the course of an industry.

5. Competitive Advantage

The company you believe would be a multibagger must have a competitive advantage compared to its peers. It will end up being a competitive stock if it has something unique associated with it. The uniqueness could be something in its product in terms of quality or an efficient way of manufacturing. It can be anything helping it scale better, have more patents, have better R&D, etc., giving it the competitive edge.

6. Management

The human factor is very unpredictable, which is what this aspect focuses on. The people running the business play an important role in directly deciding if it would be a multibagger stock or not. The performance of the company is completely dependent on the decisions taken by the management. The right decision during the time of a crisis can be extremely beneficial. A trustable management board and a good plan is a positive sign for a multibagger stock

7. Valuation

Knowing the valuation of a company is important. If it’s overvalued, there is a chance that it could plummet drastically after the popping of a price bubble. Finding the perfect company, i.e., a company that has good fundamentals, is financially in a good place, and has the right management, can be a multibagger stock.

8. Patience

Patience is key. It could take years for the true value of a stock to be recognized by investors. There have been stocks that have provided over 1000% returns over the long run. Finding a multibagger stock is only half the work. The actual task is holding on to it no matter what till it turns out to be a multibagger stock.

Conclusion

Multibagger stocks are hard to find and involve risks. To identify stocks with high potential huge amounts of money need to be spent on them and doing a lot of research. But if it doesn’t go according to plan then there are chances of facing losses due to such things as market instability, speculation for an increase in prices, or even top people being corrupt in an organization. Of course, there are high potential returns to investors but it is also possible that they may face some obstacles. To avoid these risks and create wealth in the long run through multibaggers, people need to be cautious and conduct proper research.

FAQs on Multibagger Stocks