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Multibagger Stocks – The Secret To Create Wealth

by Tavaga Invest
  • By definition, multibagger is an equity stock that gives you a return of more than 100%
  • The stock whose price has appreciated multiple times the initial investment value would be termed as a multibagger stock  

By: Tavaga Research

“Make Rs. 20,000 by investing Rs. 20”. Sounds crazy, doesn’t it? Well, Eicher Motors has done it. The equity share of Eicher Motors was trading at Rs. 22 in the year 2000, was quoting at Rs. 20,830 in July 2020. This is a 950x return in 20 years.  The share price of Eicher Motors currently is Rs. 2500 after the Eicher Motor stock split which happened in FY21 in the ratio of 1:10.

20-Year Performance of Eicher Motors Ltd.

Stock Price Return of Eicher Motors Ltd.
Source: Google Finance

For an investor in equity markets, finding such companies has been a dream. Such stocks are called “multibagger stocks” as what Peter Lynch described in his book “One Up on Wall Street” in 1988.

Multibagger stocks are equity shares of a company that gives returns that are several times their costs. Such stocks are found in high-growth industries and only a few multibagger stocks can improve your equity portfolio returns. Companies with good fundamentals, sound management, strong on governance, and those whose stock prices are undervalued tend to fall in this category of multibagger stocks.

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What is a 10 bagger in stocks?

A stock that increases by at least 900% or at least 10 times its initial purchase price, is called a 10 bagger.

What is the Myth associated with Multibagger Stocks and the Precautions one must take?

There is a misconception that low priced / penny stocks can deliver huge returns in the future while stocks with a high price cannot. This can be explained better with some examples.

1.The equity share of MRF (Madras Rubber Factory) which was trading at Rs. 6,000 in the year 2010, is today quoting at Rs. 81,500. The company has become a 10-bagger in 10 years with a total return of more than 4000% since 2000. On the other hand, 3i Infotech Ltd. which was trading at Rs. 70 in 2010, is today quoting at Rs. 8.50. The stock price has depreciated 83% since it was listed, delivering consistent negative returns in the last 8 years.

Performance of MRF Ltd. and 3i Infotech Ltd. 

Comparision between MRF and 3i Infotech returns
Source: Google Finance

2.Page industries became a 20-bagger (2000% return) by growing from Rs. 1000 in the year 2010 to Rs. 29,500 in 2021. Suzlon, on the other hand, depreciated more than 70% in the last 9 years. The share price dropped from Rs. 19 in 2011 to Rs. 5.1 in 2021

Performance of Page Industries Ltd. and Suzlon Ltd. 

Page Industries v/s Suzlon Ltd. Returns
Source : Google Finance

In both instances, MRF and Page Industries performed well than the other two companies because of the strong fundamentals and corporate governance. The management of both the companies was highly successful in creating it a well-known brand by expanding the business operations and thus growing the company multi-fold, bringing it to the leading position.

On the other hand, the stocks of 3i Infotech and Suzlon performed miserably because of large debt in their books, poor execution of expansion plans, and weak management.

Before investing the hard-earned money in stocks with high expectations of the share price growing multi-fold, one must always get well versed with the fundamentals of the company. The investor must also have the patience and conviction to hold on to the stocks until the hidden value is discovered by the market. Finally, one must consider diversification by not investing all the money in a single stock expected to give high returns as it can lead to unsystematic or idiosyncratic risk.

It is important for investors to not get caught in any kind of value trap as the stock price appreciation can be a result of the economic bubble in a particular sector / individual stock. 

How do you know if a Stock is Multibagger?

Identify Future Multibagger Stocks in India

There are ways and means with which one can identify a bunch of stocks that have the potential to become a multibagger in India and abroad. However, the most important the ways is to analyse the future earnings growth . History doesn’t always repeat itself and hence the future of the company must be taken under consideration primarily with the guidance of historical growth. 

All Multibagger companies in the past depict some similar properties in terms of the company and financial characteristics. Below are some guiding principles which can help the investor to identify future multibagger stock:

  • Pick an industry with strong tailwinds: It is very important to find an industry that can grow multi-fold in the next 5-10 years. It will be very difficult for the company to grow if the industry fails to grow
  • Low or no debt: Borrowings of the company must also be taken under consideration before investing. Financial leverage can be best defined by the debt to equity ratio which is calculated by dividing the company’s liabilities by shareholder’s equity. The optimal debt to equity ratio should not go beyond 2.0. A ratio of 2.0 indicates that a company finances its capital from 67% debt and 33% equity 
  • Look for a company with a competitive advantage or a wide moat: Along with earning above-average profits, its sustainability is equally important for a company. The driving factor behind sustainable high-profit growth is a competitive advantage. 

A company can enjoy a competitive advantage over other companies with the help of high market share, by creating a strong brand, lower input costs, and a unique product line 

  • Strong and visionary management: Corporate governance is often underestimated while investors choose the stocks to buy. A potential multibagger stock must possess capable management with high integrity. The strength of the management can be determined with key features like the independence of auditors and the board of directors, the value of the shares pledged, related party transactions, etc.
  • Decent and reasonable valuations: A good company may not necessarily be a good stock. For example, Wipro, which is considered one of the best companies from the IT sector has only given a CAGR of 0.4% in the last 20 years. PE ratio growing at a faster pace than the stock price can be considered as one of the indicators to identify a potential multibagger stock 
  • Strong earnings growth: Earnings growth of a company can be best gauged by the Earnings per Share (EPS). EPS indicates the share of a company’s profit attributed to each share and is calculated by dividing the company’s net profit by the shares outstanding

Multibagger Stocks of last 2 Decades:

1.Dixon Technologies

3-Year Performance of Dixon Technologies Ltd.

Share Price Performance of Dixon Technologies Ltd
Source: Google Finance

A leader in the Electronic Manufacturing Services space, Dixon Technologies has shot up 5x in the last 3 year and has delivered a return of 558%.

2.Bajaj Finance

5-Year Performance of Bajaj Finance Ltd.

Chart on 600% returns by Bajaj Finance over the last 5 years
Source: Google Finance

Bajaj Finance Ltd., a diversified NBFC engaged in consumer, SME (Small and Medium Enterprises) and commercial lending, has shot up almost 6x in the last 5 years delivering a return of 600%.

3.Asian Paints Ltd.

20-Year Performance of Asian Paints Ltd.

Chart on 21000% returns by Asian Paints over the last 20 years
Source: Google Finance

Engaged in the business of manufacturing, selling, and distribution of paints, Asian Paints Ltd. has shot up more than 100x in the last 20 years delivering a return of 21000%.

4.Marico Ltd.

20-Year Performance of Marico Ltd.

Chart on 14000% returns by Marico Ltd. over the last 20 years
Source: Google Finance

Provider of consumer products in the areas of health and beauty, Marico Ltd. has shot up 175x in the last 20 years, delivering a return of 14,150%.

If we can about the last 6 months and the multibaggers of 2020, SBI has emerged as the leader with 87% return over the last 6 months and a strong financial performance amidst the tough times. Further, Ultratech Cement Ltd. and Bajaj Finserv also outperformed the market with 68% and 61% returns over the past 6 months.

20-Year Performance of SBI

Returns of SBI stock since 2000s
Source: Google Finance

Risks Associated with Investing in Potential Multibagger Stocks:

  • Lower levels of liquidity: Sometimes, the lack of information and quick money attitude can lead to investor bearing liquidity risks which are seldom higher in stocks whose price has not been discovered by markets
  • Relying on stock tips and recommendations: While it is advisable to take guidance from authentic research reports before investing in stocks, one must not depend on them. One’s own analysis must be preferred over stock tips and recommendations from anonymous sources
  • Uncertainty of rewards: There is a lower probability of higher rewards from all the potential multibagger stocks and a greater chance of markets failing to discover the expected price of the chosen scrips.  

The most important aspect post investing in a potential multibagger stock is one’s patience and ability to hold the stock through thick and thin times as the company itself takes many years to establish as the leader in the sector. Sometimes, the ability to hold the stock is more difficult than identifying a potential multibagger

The idea of multibagger stocks sound very fascinating at first, but identifying the potential ones and holding on to them during their good and bad times both, is a hard task. This is true especially for retail investors who find it difficult to do proper research all the time. Hence, a better idea is to track the index by investing in Exchange-Traded Funds (ETFs).

30-Year Performance of Sensex

30-year Performance of BSE Sensex
Source: Google Finance | BSE Sensex has shot up 10x in last 20 years and has delivered a return of 910%

Nifty 50 and Sensex, India’s most-followed indices, have delivered multi-fold returns in the past. While it is true that the returns generated by both indices have comparatively taken a longer time horizon than the individual stocks, investors have benefitted from higher liquidity and diversification by investing in ETFs. Also, the investor doesn’t even need to time the markets all the time or do any fundamental analysis, unlike individual stocks. 

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1 comment

Bharti Patel September 14, 2021 - 4:03 pm

Thanks For this Informative information I Gain lot of knowledge from This Best Multibaggers Stock For Long Term


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