- 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, is today quoting at Rs. 20,830. This is a 950x return in 20 years.
20-Year Performance of Eicher Motors Ltd.
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. 63,000. The company has become a 10-bagger in 10 years with a return of more than 1000%. On the other hand, 3i Infotech Ltd. which was trading at Rs. 11 in 2012, is today quoting at Rs. 2.50. The stock price has depreciated 81% in the last 8 years delivering consistent negative returns
Performance of MRF Ltd. and 3i Infotech Ltd.
2.Page industries became a 20-bagger (2000% return) by growing from Rs. 1000 in the year 2010 to Rs. 20000 in 2020. Suzlon, on the other hand, depreciated more than 75% in the last 9 years. The share price dropped from Rs. 19 in 2011 to Rs. 4.5 in 2020
Performance of Page Industries Ltd. and Suzlon Ltd.
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?
There are ways and means with which one can identify a bunch of stocks that have the potential to become a multibagger. However, the most important of them is 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.
Below are some guiding principles which can help the investor in identifying potential multibagger stocks:
- 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-Year Performance of Dixon Technologies Ltd.
Source: Google Finance
A leader in the Electronic Manufacturing Services space, Dixon Technologies has shot up 3x in the last 1 year and has delivered a return of 250%.
5-Year Performance of Bajaj Finance Ltd.
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 500%.
3.Asian Paints Ltd.
20-Year Performance of Asian Paints Ltd.
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 10000%.
20-Year Performance of Marico Ltd.
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 17,400%.
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
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.