54% of NSE500 stocks delivered multibagger returns in 20 years! GS lists 6 traits they have in common

Global brokerage house Goldman Sachs (GS), in a recent report, highlighted that India has delivered the highest proportion of multibaggers over the past 2 decades. The brokerage has analysed 10 major markets across emerging and developed markets and covered 6,700 stocks to examine multibagger shares that have generated at least 10x total returns within a rolling 5-year period over the past two decades.

As per the report, in India, more than half (54 percent) of the NSE500 - 269 stocks - have generated multibagger returns, the largest proportion of multibaggers among the 10 markets versus 30 percent and 20 percent averages for EM and DM, respectively.

In comparison, China (MSCI China) and Taiwan (TWSE) markets had only 18 percent while the US (SPX) and Japan (Topix) had 16 percent stocks generating 10-bagger returns, one-third of the proportion of the stocks in India, it informed.

In addition to a strong track record of delivering long-term beta via a simple buy-and-hold index strategy, the equity market in India has offered outsized stock returns and alpha opportunities for EM investors, noted the brokerage.

It further revealed that over the past two decades, about 60 percent of the current BSE 200 stocks have outperformed the benchmark and nearly 40 percent of the current BSE 200 stocks have generated more than 20 percent annualised returns, double the 20 percent of stocks for broader MSCI EM. This suggests ample alpha opportunities in the Indian markets, said the brokerage.

The report further pointed out that India’s economy has grown 7-fold in the past two decades, delivering a nominal GDP CAGR of 10 percent and equity returns have matched this strong economic performance, with BSE 200 offering 16 percent/13 percent annualised returns in local currency/USD terms. This is almost double the 7 percent offered by the MSCI EM index.

"At its core, the investment case for Indian equities has been the potential to deliver higher returns than many of its emerging and developed market peers, given its higher growth potential, supported, among other things, by favorable demographics, ongoing reforms, and formalization of the economy with increased digitalization," explained the report.

All of the 269 multibagger stocks share a number of the following traits, observed the brokerage: 1) high realised growth rates; 2) high capital return ratios; 3) mid/small-cap bias; 4) inexpensive starting valuations; 5) domestic sector orientation; and 6) high promoter holding.

High realised sales and profit growth: As per the brokerage, multibagger stocks have exhibited high revenue and earnings growth. It informed that about 60 percent of the multibaggers managed to generate at least 20 percent revenue growth and at least 30 percent profit growth during their outperformance periods. The median sales CAGR was 25 percent, while the median profit CAGR was 37 percent. This reinforces the core investing principle that earnings growth is the fundamental driver of long-term equity returns, noted GS. Moreover, 80 percent of the multibaggers have seen a margin increase during their outperformance periods, likely reflecting the high efficiency of the businesses and high pricing power, it added.

Capital allocation – high return ratios: The report also noted that multibagger stocks are efficient capital allocators and exhibit high return ratios. A majority of the multibaggers generated ROE (Return on equity) and Cash ROIC (Cash return on invested capital) in excess of 15 percent during their outperformance periods. About three-fourths of the multibagger stocks had increasing ROEs, it stated.

Size – small/mid-cap bias: According to GS, smaller companies (in terms of market cap and initial share in profit pool) imply larger headroom for growth and a favorable low base effect for stock returns, all else being equal. Consequently, smaller companies with rapid growth rates are more likely to become multibaggers. The brokerage noted that about half of the multibaggers in India had an initial market cap of less than $50 million. While market cap categorizations and thresholds vary over time, about 70 percent of the multibaggers belonged in the bottom 250 of the NSE 500 constituents in their initial year (typically small caps) and only 12 percent belonged in the top 100 NSE 500 constituents (large caps), suggesting multibaggers historically have been dominated by small and midcap stocks, analysed the brokerage.

Sector tilt – domestic cyclical concentration: Sectorally, said GS, domestic cyclical sectors (investment and consumer cyclical) have produced the largest number of multibaggers (54 percent). Specifically, cement, chemicals, capital goods and consumer durables and retail have seen the largest number of multibaggers, it informed. While some multibaggers also belonged to non-domestic sectors (IT/exporters, commodity cyclical), the majority of the multibaggers were from domestic cyclical sectors in 70 percent of the years over the past two decades, highlighted the brokerage. As per GS, this suggests a strong tilt towards domestic cyclicals, across multiple periods historically.

Inexpensive starting valuations: The brokerage also pointed out that about 70 percent of the stocks in its universe either traded at less than 1x LTM P/B ratio or below 10x NTM P/E before they eventually became multibaggers. The “low starting valuation” of multibaggers however seems to be correlated to prevailing broad market valuations, it noted. About 60 percent of the multibaggers took off during market crisis periods of 2001-2002 (dot com crisis), 2008-09 (GFC), 2013 (taper tantrum concerns), and 2020 (Covid-19 shock), it observed. According to GS, this suggests that external crises/shocks or low prevailing market valuations have offered good entry points historically for picking multibaggers and also partly explains why the previous decade (2002-12) produced more multibaggers than the recent decade (2013-22).

High promoter holding: Finally, the brokerage also mentioned that on average within the multibagger companies, promoters held a majority equity stake (58 percent), while institutional investors had relatively smaller ownership of 23 percent at the start of the multibagger period. In terms of the distribution, about 60 percent of the multibaggers had promoters as the majority shareholders (>50 percent holding) at the start (before the stocks took off), noted the brokerage.

However, the brokerage also acknowledged that the above six characteristics are not exhaustive and there are likely to be other unobservable or hard-to-quantify factors (such as competitive advantage, quality of management, etc.) that also contribute to the strong returns. However, as per the brokerage, all 269 historical multibagger stocks in India over the past two decades share at least one of the above 6 traits, and about 75 percent of them share at least 4 traits.

Among the six factors, size, promoter holding, growth, and valuations have been comparatively more dominant factors, while sector and capital allocation appear to be less influential in identifying multibaggers, it noted.

Risks

While India has historically offered superior multibagger peak returns (24x median total returns vs. 16x for the overall 1500 multibagger stocks across 10 markets), it also pointed out that stocks don’t go up in a straight line and often investors are likely to face drawdowns on the road to multibagger returns, particularly given the small-mid-cap dominance among multibagger stocks, usually associated with higher price volatility.

Another more fundamental risk, GS said is if valuations (as the multibaggers take off) become stretched, or even worse, if the operating performance of the stock deteriorates, which could be trigger points for harvesting gains. It observed that history suggests that it has taken 52 months (more than 4 years) on a median basis for stocks to reach their peak, suggesting a long runway for growth. However, GS added that it acknowledges the need for active position/risk management for these small/mid-cap multibaggers during the course of delivering their outsized returns.