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12 Aug 2018

STOCK MARKET-How do identify multibagger stock?



All the multibagger stocks have many common factors, namely:
1. They have a small market cap (less than ₹1000cr, smaller the better).
2. The stock is illiquid. They are not tracked by brokerage houses and there is no/negligible institutional investor present.
3. They have a first generation management. (Like Sunil Mittal of Bharti, Dhirubhai Ambani of Reliance, Poddar of Mayur Uniquoter, etc.)
4. Zero debt or Debt to equity ratio of less than 0.5.
5. High ROE (return on equity) and High ROCE (return on capital employed)
6. Low P/E ratio. (It's not a norm but chances are high since P/E re-rating exponentiates your return. There are many high PE stocks which go further up but that judgement will come from experience and knowledge. It can't be taught.)
7. Ethical and Efficient Management - The single most important factor to watch out for while hunting for a multibagger. Since, it's an intangible factor and can't be found by equations or an excel sheet. It can only be evaluated by reading annual reports, articles on the management, researching about their past, their views on the business, and if you need a shortcut then look out for the business' ROE. If it's high, then most of the time the management will be efficient.
8. Scalable Business Model - Rakesh Jhunjhunwala gave example of Lupin, how it went up from 1 to 2000. It went up because the business was scalable. The Pharma industry is huge. It can accommodate 10 more Lupins.
9. Sector Leader - There are high chances of sector leader in a scalable sector to become a multibagger.
10. Future Growth Potential - In 1995, Hero Honda had a market cap of 200 crores. They sold one bike for ₹20,000. By conservative estimate, even if we assume that 10 million people will buy a bike, the whole 2 wheeler market was pegged at ₹20,000 crores (10m x 20,000). So, the sector leader was quoting at ₹200 crores and the whole sector was ₹20,000 crores. That itself gave Hero Honda 100x potential. Whoever spotted that potential, is happily retired.
In conclusion, I'll say that finding a multibagger is as hard as finding a needle from a sack of rice. You need to give your time, your effort for this..But trust me that all efforts would be worth it!

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