Ever heard of investing ₹20 and making ₹20,000. Eicher Motor is a stock that made that possible. From trading at ₹22 in 2000 to ₹20,800 in 2020, the stock gave returns of nearly 95,000 to its investors in 20 years. Such a stock is known as a multibagger. These are the stocks that give exceptional returns in the long term and multiply your investment value.
Coined by Peter Lynch, multibaggers are stocks that have given returns over 100 percent or doubled the value of a stock in a period of time. These are stocks that give way more returns than their initial investment value like in the case of Eicher Motors. An investment of ₹20 would have turned to ₹20,000 in 20 years.
Such stocks are generally undervalued but have very strong fundamentals and management, making them a great long-term investment opportunity. Such companies also have high growth potential and robust revenues.
How to identify multibagger stocks?
1. The first thing you need to look at is the debt level of the company. It should be within a reasonable limit. While this varies from sector to sector, any company with a debt of more than 30 percent of its equity value is not ideal.
2. The second important thing is to look at the previous performance of the firm. One must check how the company has performed at least in the last 3-5 years and if there is a stable and consistent increase in its profits and revenue. This could indicate whether the company has the capacity to continue to increase its revenue steadily in the future.
3. It is also important to check the management background of a firm. A stock is more likely to become a multibagger if it has strong management without major cases of public disagreements like CEO or board members quitting at a quicker pace. Strong and sound management is a key aspect of a firm with good growth potential.
4. One can also calculate the price-to-earnings ratio (PE) as well as the earnings per share (EPS) of the company to gain better insight into the firm. If the EPS is consistently rising and the PE is growing faster in comparison to its stock price, then the probability of the stock becoming a multibagger is higher.
5. It is also important to understand the business model and structure of the firm as it impacts the operations which in turn affects the stock price.
6. It is important to pick a sector that is likely to advance majorly in the coming decade. It will be difficult for a firm to grow if the sector doesn't.
Let's take a look at some biggest multibaggers in the last 5 years:
1) Adani Transmission: This power transmission firm has rallied over 4800 percent from around ₹40 in 2016 to over ₹1,950 in November 2021.
2) Alkyl Amines: This chemical firm surged over 2,400 percent in the last 5 years from around ₹130 to over ₹3,200 in November 2021.
3) Deepak Nitrite: The stock jumped over 2,100 percent in 5 years from around ₹105 in 2016 to over ₹2,300 in November 2021.
4) Coforge: This IT firm jumped from around ₹440 in 2016 to over ₹5,400 in 2021, surging over 1,100 percent in this period.
5) HEG: This graphite electrode company rallied from ₹200 in 2016 to over ₹2,100 in 2021, jumping nearly 1,000 percent in 5 years.
Some major blue-chip firms like Bajaj Finance, Bajaj Finserv, Titan, RIL and Divi's Labs have also turned multibagger in the last 5 years, rising between 300 percent to 600 percent in this period.
Every investor looks for stocks that would give them multiple returns in comparison to their investment. However, it is not very easy to identify such a stock when it is undervalued. The above list may make it easier now for you to identify and invest in a multibagger. Happy investing