6 Most important factors to consider while searching for a Multibagger

Multibagger : This term is used frequently by lot of users and portfolio services, in different contexts. Even while showing just an 80% growth in their recommended stock price, they may use this word! But the actual meaning of the term is multifold appreciation / return in the share price. Like a four bagger means it multiplies the share value by 4 times and like 10 bagger, 50 bagger, 100 bagger so on.

Its more than 8 years since I started my investing career, and during this phase, I had seen lot of shares becoming multibaggers and also lot of shares gone in to dust. Few of the shares invested by me also became multibaggers, but very few are the companies I am still holding, thus effectively reducing my net asset value. So creating long term wealth have two parts, 1. Identifying the right stocks at early stage with multibagger potential, and 2. Having enough conviction to hold long enough to enjoy the multibagger returns.

In this post I am concentrating on first part, ie. How to evaluate a given tip / information about a company from any circle to conduct a detailed analyze and finally decide whether to go for it or not.

Based n my personal experience, I think the following six factors are very important as per the given order in a decreasing importance.

Factor 1: Promoters Quality  [Click HERE for details]

Promoters are the persons manage the company’s activities, and any long term sustainable return will be achieved for retail investors, only if, the promoters are above average r at-least average quality. No ship will reach its destination, if a thief is placed inside itself as a Captain!

Each of the factors I am going to discuss may require a lot of details, and I think it’s better to post separate articles for each of these factors later, in detail.

[Please note, there may be cases of multibagger return with unethical promoters managed companies also, but sustainability of the same is the question? For details see the link HERE ]

Factor 2: Business opportunity, scalability and sustainability

The second important factor t consider after evaluating the promoter is the business perspective of the company’s operation and it's niche.

Factor 3: Market Capital

The present market cap of the company should be evaluated. Few may raise their eyebrows after seeing this point. But I think it’s very essential, since an already large cap may not be able to grow at a greater rate in long term.

[Example: In-order to get a 10 bagger in 10 years and a 100 bagger in 20 years, we require a 26% CAGR. And I bet, TCS won’t be an 10 bagger in next 10 years nor 100 bagger in next 20 years, since it’s market cap is already 5 Lakh Crore – at best it may give market related return 14 – 18 % only, making it 3 to 5 bageer in 10 years and 13 to 27 bagger in 20 years]

Factor 4: Valuation

The next point is to get in to the ship at an reasonable level. Once the valuation becomes too stretched and along with the market cap also reaches threshold levels, and we may need to consider different parameters and situations.

Factor 5: Growth in quarterly results and debt levels

Check the overall debt level and their increase; along with the performance and results on a quarterly basis giving importance in that order.

Factor 6: Share Holding Pattern

The number of share holders and their distribution is also important. An already popular stock will be having mutual funds and others in it as investors. Where, a true multibagger return will be only possible if the stock is less popular. Also check for the promoters and retailers portions in the holdings, and number of retailers etc.

Each of these points mentioned require a detailed coverage, and few other factors also (dividend, bonus, FV split etc) required to discuss with these already mentioned major points. It will be posted one by one in the above order.

Happy investing.