How to identify multibagger stocks for 2022 and beyond

Market


You probably wouldn’t believe us and that’s okay. We understand the scepticism.

But it is possible. There is a way.

It’s not a guaranteed method or a sure shot strategy which will make you rich. But it does work if you give enough time.

And yes, it is simple to understand.

This method works only when you are willing to open your mind to future possibilities and have patience.

Continue reading to know more about investing in multibagger stocks and how to identify them early.

Identifying Multibagger Stocks

Tata Elxsi, Tanla Platforms, and Alkyl Amines.

Surely, these are the top multibagger stock stories that come to mind over the past couple of years.

If these three don’t make the list, it could be other stocks like Balaji Amines, HLE Glascoat, Bharat Rasayan, or Supreme Industries.

All these stocks have delivered phenomenal gains over the past 5-7 years.

And I’m not talking just 2-3x gains but gains ranging between 8-10x.

But do you know what features or common traits these companies have in common? What separates them from a thousand others in the stock market?

Well, that’s the formula for finding the next multibagger stock for your portfolio.

In this article, we analyse seven companies which are the top wealth creators in Indian share markets over the past 5-7 years.

All of them share seven common traits. Remember our previous editorial titled ‘The Power of 7’?

We’ll see the power of these seven traits and identify multibagger stocks for 2022 and beyond.

Let’s get started.

 

#1 Competitive Advantage

First things first…

To avoid any confusion, we’ve jotted down the gains these seven companies have delivered over a 5, 7 and 10-years.

Here’s how the grid looks like…

Slow Journey but A Cheerful One

Company 5 Year % Change 7-Year % Change 10-Year % Change
Tata Elxsi

902%

1,237%

7513%

Tanla Platforms

2,841%

8,742%

23,003%

Alkyl Amines

1,521%

2,256%

16,770%

Balaji Amines

722%

3,066%

7,903%

HLE Glascoat

2,417%

4,718%

14,123%

Bharat Rasayan

355%

1,589%

9,605%

Supreme Industries

75%

197%

854%

Source: Equitymaster

Coming back to the traits of multibagger stocks…

The first thing which you need to look out for is the company’s competitive advantage, or lack of it, in its industry.

The quality of the underlying business should pass the test of surviving through perfect storms and emerging out stronger than ever.

Look out for businesses which will be relevant decades from now. Think of FMCG companies’ brands or other monopoly stocks that continue to thrive today.

In the end, if the quality of business continues to be top notch and the company has a durable competitive advantage, the time to sell the business is never.

Over the years, Tata Elxsi has focused on high growth emerging sectors and enjoyed the ride in artificial intelligence (AI), electric vehicles (EVs), semiconductors, Internet of Things (IoT), and more.

Alkyl Amines and Balaji Amines both have the advantage of being the industry leaders in the aliphatic amines segment.

Tanla Platforms has come a long way to become a monopoly business in the OTP market.

So the first thing to look for is durability of the business and its competitive advantage.

 

#2 Sales and Profitability

Now this is an obvious trait.

If you take a close look at the world’s finest businesses, you’ll notice they have reported consistent and growing sales and profits over the years.

This is the second trait and an important one to look out when identifying high return stocks.

Have a look at a few tables below which show the sales, profit and growth of the seven companies:

 

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As you can see, barring 1-2 years for some companies, most have reported growth every passing year. That too, over a 10-year period.

So, it should come as no surprise these companies have been among the biggest wealth creators in India share market history.

#3 Marketcap

Finding multibagger stocks is no easy task. The listed universe comprises thousands of companies. Filtering out a select few from them is like finding needles in a haystack.

That is why you must have some criteria laid out to find these hidden gems. One such criteria is low marketcap.

Big companies are well known among investors. But they all started from scratch when they were trading at a low share price and a low marketcap.

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What’s interesting about this list of companies is that all of them began as companies with marketcaps less than 6-7 bn. With one exception.

These companies were ignored by investors and institutions as not enough shares were available in the market. The trading volume was low.

But as soon as these companies came into attention, institutions and investors loaded up shares big time.

Alkyl Amines had a marketcap of less than 1 bn, with barely 11,000 shares traded daily in 2010-11.

Same for Tanla Platforms, Bharat Rasayan, and HLE Glascoat. They all had low marketcaps.

As the years passed, these stocks multiplied their topline and operating profits. What followed was a massive rally.

#4 Debt

Whilescreening stocks, an important and obvious metric one should consider is to look at the company’s debt. Too much debt can sink a company.

In financial terms, leverage means the ratio of a company’s loan capital (debt) to the value of its ordinary shares (equity).

The two ratios to look at here are the debt-to-equity ratio and interest coverage ratio.

An important point to note is high level of debt alone cannot define the company’s ability to service it. There’s a good chance the companies with high debt can generate strong cash flows to service their interest cost and re-pay the debt comfortably.

Therefore, a better way to identify the risk is to check theinterest coverage ratio. A higher coverage ratio is better, although it may vary from industry to industry.

Let’s look at the seven companies and how they have fared on both these metrics.

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All these companies had low debt and in cases where debt levels exceeded equity, they fared well on the interest coverage ratio.

#5 Free Cash Flow

Free cash flow shows how much actual cash a company has at its disposal.

When a company needs to service its debt, or pay dividend, it needs cash to do so. If a company has a large amount of excess cash, depending on the industry, it might be able to ramp up production, fuel acquisitions or return money to shareholders.

While this may sound like a simple point, it should be looked upon deeply. It should be on an investors’ ‘need to know’ list.

Here’s a lookback at the seven companies free cash flow over the past few years.

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A few companies have reported negative free cash flow for some years, but most have reported positive figures. This proves that free cash flow is important when identifying multibagger stocks.

#6 Promoter Holding

The level of promoters’ shareholding is very important, especially in India where many businesses are family owned.

The shareholding level acts as an indicator about the confidence of the promoters in the business as well as the strength of leadership control in the company.

Over the years, the seven companies have enjoyed high promoter holdings.

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As is evident from the table above, in most cases, the promoter holding exceeds 40%.

A company with a very high promoter shareholding often represents a scenario where the promoters see a bright future for the company. In turn, they plan to benefit from its good growth.

A promoter has all the information about the company. If they are investing, it shows they’re confident about the company’s prospects.

#7 Return on Equity (ROE)

At last, we have return on equity (ROE).

Return ratios represent a company’s ability to generate returns for its shareholders. Investors look at these ratios to get a clear representation of its performance.

The ROE tells us how much profit the firm generates for each rupee of its equity. For example, a firm with a ROE of 10% means that they generate a profit of 10 for every 100 of equity.

Not surprisingly, all seven stocks have fared well on the ROE front and have consistently improved.

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Check the company’s ROE and other return ratios over several years and analyse each of its components. It will help you understand the company’s profit and loss statement better.

 

The Simplest Way to Find Safe Multibagger Stocks

So there you go.

A proven, simple and effective technique for identifying multibagger stocks.

Look for stocks which have these common features and you’ll most likely come across a multibagger in the making.

Mind you, Mr. Market has its way of rewarding stocks in various ways. Multibagger returns could come in a year or six months.

You could also be lucky enough to take plunge into a stock like Adani Power, which delivered 145% returns in under a month.

But here’s what you need to know about these stocks. It takes patience, and a lot of it, to come across such gains. We’re not talking a year or two here but more.

You’ll come across phases when nothing spectacular happens and think that you’re better off without this stock. Instead of being bored, take comfort in the wealth you will earn in the long term.

To make things easier for you, we have compiled all our knowledge about multibaggers, as well asfour proven approaches to picking multibagger stocks in an easy to readfree guide.

Happy Investing!

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

 

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