As an investor, the first major goal you would set for yourself is to invest in the best stocks that provide you great returns while multiplying your money. Stock brokers have coined a popular term ‘multibaggers’ for such stocks. Knowing that you would ideally like to invest in multibagger stocks in one thing, identifying and investing in multibaggers is another. There could be a few challenges associated with identifying and investing in multibaggers for medium to long term.
Multibaggers are small-cap, mid-cap, or large-cap stocks, which possess great potential to grow in terms of share price. Therefore, the immediate question that comes to your mind is how you could identify and invest in multibaggers?
This article will provide you with tips to go about investing in multibaggers. Here we go!
Identify companies with low debt
Choose companies that grow at a swift pace and have a low debt composition. If a company grows with the help of its own financial resources, it is a healthy sign for the shareholders. Debt reduces the returns that a company would provide to its investors in the form of dividend. Companies will have to repay external creditors first before dispensing dividends to investors. Thus, companies with low or zero debt could be your best bet as multibaggers.
Pick companies with annual growth rate of around 30% or more in earnings per share (EPS) and good operating performance
EPS is nothing but the profits earned by a company per share outstanding on the book closure date. Therefore, EPS is a good indicator of a company’s overall profitability. You could pick companies with annual EPS growth rate of 30% or more as multibagger options.
Earnings before interest, tax, depreciation, and amortisation (EBIDTA), commonly known as operating profit earned by a company, indicates propensity of a company to manage its operating costs while maximising its revenue. Growth in EBIDTA margins of a company compared annually would give you a good picture of the operational efficiency of a company. Thus, companies with strong and consistently growing EBIDTA margins can be multibaggers since they possess good potential in terms of returns.
Revenue source could be a good indicator
The source of revenue for a company could be a major factor in determining multibaggers. If the company falls in a booming segment of the economy or a segment with strong prospects, the stock possesses potential of becoming a multibagger.
Look out for P/E ratio
Price-to-earnings (P/E) ratio is a popular tool used to measure the overall returns of a company. It is arrived at by dividing the share price of a company with its EPS. You can choose companies with P/E ratio of around two, which indicates that the share price is twice that of EPS. Moreover, if growth in EPS of a company is higher than the growth in its share price, it augurs well for the company, making that stock a multibagger option.
Keep an eye on investment patterns of companies
Many companies tend to invest consistently in new businesses and innovative products, which generally involves heavy capex. ROI tends to happen mostly in subsequent years in such cases. You must keep an eye on such investments to determine the exact time to invest in such a company’s stocks to make it a multibagger. Moreover, watch out for any structural changes such as demergers and business splits in a company. These changes could have a big impact on the share price. The demerged unit or the split unit’s stock could be a multibagger.
Watch out for companies that have unique business models
Companies that enjoy monopoly or duopoly in a particular industry could be ideal multibaggers since new entrants into such markets will find it tough to exist and compete. Moreover, if a company comes up with one-of-its-kind business, it could be your multibagger option.
Identifying multibaggers can be tricky but not difficult. However, if you are finding it tough to identify and invest in multibagger stocks, simply contact a professional stock broker now and that’s the end of that as far as your investment in multibaggers is concerned.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.