Multibagger Stocks: Meaning and Identification
As an investor in the stock market, you may expect to earn very high returns from your investments. Most investment options require a long term investment to offer decent returns which may not be enough for your financial needs.
Multibagger stocks are known to offer extremely high returns in a medium time period. With only a small allocation of your portfolio to these stocks, you can amplify your returns without having to risk a lot of money. That being said, as a matter of rule, with higher returns comes higher risk. Most of the potential multibagger stocks are also riskier and more volatile than stocks of major blue-chip companies which are fairly stable.
What Is a Multibagger Stock?
Multibagger stock is a term used to describe stocks that have the potential to offer exceptionally higher returns than their investment. Usually, a multibagger stock offers a return of more than double (100%) of its invested amount.
Multibagger stocks have extremely strong fundamentals and have the potential for very high returns in a considerably short time. However, these stocks are initially undervalued and are only considered multibagger once investors discover such stocks.
The term ‘multibagger’ was first used for stocks in a book called “One up on Wall Street” by Peter Lynch. Stocks that offer double their investment are called two-bagger stocks; stocks giving triple returns are called three-bagger stocks and so on.
Thus, stocks that provide returns several times higher than their initial investments are called multibagger stocks. However, it is important to understand, multibagger stocks are not promising initially and multibagger only in hindsight.
An investor needs to stay invested over time to reap high returns from multibagger stocks. Once such companies have built their business reliably, they can give exceptionally high returns in a time span as short as a year.
To understand the concept of multibagger stocks refers to the following example. Suppose you invest ₹10,000 in a stock called ABC Limited in 2012. In one year, your investment increased to ₹40,000 and 10 years later in 2022, now your investment has increased to ₹1,00,000.
Therefore ABC Limited is a multibagger stock as it offered a 900% return in 10 years and a 300% return in one year.
How to Find Multibagger Stocks?
Multibagger stocks are not easy to identify for individuals. Usually, financial experts study several aspects carefully over a long period to understand which stock can be a potential multibagger.
However, the primary concept of a stock-turning multibagger is the company’s ability to stay ahead of the market and to have strong financial growth. Keeping that in mind, you can try to identify a multibagger stock by following the components mentioned below.
- Reputable Promoters
A business has better chances of progress if it has successful and hardworking founders and promoters. The people running the business can directly contribute to its success by implanting productive steps at the right time. Hence besides all other factors, it is important to check if the company has strong promoters.
- Growing PE Ratio
The Price to Earning (PE) Ratio of a stock should increase faster than its share price for a multibagger share. The PE ratio of a share is its price compared to its earnings per share.
- Low Debt Against Equity
Companies that have a low debt against their equity and have strong internal capital to invest in the business expansion are potential multibaggers. They are also less risky investments.
- Ahead of Competition
You can identify a multibagger stock by its market performance. If a company is always preferred by the public over its completion as it satisfies the demand of its customers, then it will keep expanding in business and returns for investors.
- Effective Research and Development (R&D)
Research and development of a company’s products and marketing keep it innovative and help it to offer something new to the customers. Reinventing themselves is an important aspect of good future performance. Thus, a company with a strong R&D team has multibagger potential.
- Powerful Management
For a company to perform optimally, it needs a good management team. Sound management can ensure efficient workflow and production. In addition, it is capable of handling unknown challenges like a financial crisis. Hence, a company needs the backing of efficient managers to become a multibagger stock.
- High Business Turnover
Businesses that have the quality to turn into multibagger stock usually have a prominent profit turnover. They have a significant difference in profit margin in the market as compared to their competition.
Why Should You Invest in Multibagger Stocks?
Multibagger stocks are always attractive as they offer exceptional returns to investors. When people invest in multibagger stocks, they can expect high returns on low investment.
For example, if you invest ₹1,000 in a multibagger stock it can give you a return of ₹10,000 in one year if it is a ten-bagger stock. Hence, the primary reason for such investment is to get a high return on investment.
In addition, multibagger stocks also allow you to cash in on undervalued stocks. Initially, such stocks are undervalued and such stocks do not have a high market price. However, if you invest wisely in a potential multibagger you can get the opportunity to enjoy the returns from an undervalued investment.
What Are the Risks of Investing in Multibagger Stocks?
Most investments that offer high returns also have high risks for an investor, especially if the asset is subject to market performance. Multibagger stocks have certain risks that you should understand before investing your capital.
- Lack of Certainty
Multibagger stocks take a long time to show potential assurance of exceptional growth. There’s no assurance if a stock will be multibagger even if you identify it at an early stage. Hence, investing your capital without certainty can result in a significant loss for you.
- Low Liquidity Risk
Undervalued stocks need some time to grow and hence an investor has to wait for a long time if they want to enjoy the profits. Initially, multibagger stocks have volatile performance and hence, it is difficult to buy out without losing profits during that period.
- Batch Investment Risk
You need to invest in bulk amounts in multibagger stocks to enjoy its profit in the long term. It is insignificant if you invest a nominal amount and wait for its returns for years. This means your capital will be locked in it for the investment period and due to low liquidity, you cannot choose to convert it to cash when required.
- Capital Loss Risk
Potential multibagger stocks are not guaranteed success and they can also face losses. As you need to invest a bulk amount in such stocks, you will also face a substantial loss if the stock falls. This is one of the most crucial factors you need to consider while investing in multibagger stocks.
- Risk of Economic Manipulation
Investors often consider stocks with high demand as potential multibaggers. Such shares increase in value quickly often due to institutional investors hyping the price. When these investors short-sell these shares for their benefit, retail investors are caught up in a sudden fall. Hence you need to consider such possibilities before investing.
What Are the Alternative Investment Options?
Multibagger stocks are very rewarding but they are also difficult to identify for an average investor. In addition, it also comes with a significant risk factor. However, there are a number of investments that provide a better balance between risks and returns.
Here are some alternate options to invest your capital and balance your portfolio.
- Hybrid Mutual Funds
This type of mutual fund invests in different categories of shares, bonds and other securities. It offers you an opportunity to invest in multiple types of assets with a single investment.
These funds are managed by experts and hence the risk factor is not only balanced but also considerably lower. In addition, the returns are comparatively higher than low-return assets like bonds as they invest in high-return stocks as well.
- Thematic Mutual Funds
As its name suggests, these equity funds invest in a specific sector or theme to grab the opportunity to earn high returns from a thriving sector. Thematic funds invest in technology, medicine, infrastructure, metal, automobiles and many other sectors that are performing exceptionally. This investment exposes your capital to the performance of several companies in a particular sector rather than just one single company.
- Mid Cap Mutual Funds
This category of equity funds invests in companies that are considered mid-cap according to stock market indices. Such companies have comparatively stable fundamentals but have the potential to expand a lot more. They offer more risk than large cap stocks but are considerably safer. These funds offer high returns and are much safer than multibagger stocks.
- Large Cap Mutual Funds
Companies with high market capital which are safe during market volatility are called large-cap companies. Such companies are safe and have strong customer loyalty. Hence, they are always safe and progressive in profit.
Large cap funds invest in several such companies and offer investors high returns. However, these companies do not perform as well as mid-cap or small-cap companies in bullish markets, but they are much safer in comparison. Therefore, it is better to invest in such funds.
Multibagger stocks have the potential to offer you distinctive returns compared to other equity assets in the market. These stocks have exceptionally rapid business growth in a short time due to good quality of products and effective management.
If you want to earn high profits in a considerably short time you should identify undervalued stocks that can become multi-baggers and use the opportunity to invest your capital and earn very high profits.
Frequently Asked Questions
Much should you invest in a potential multibagger stock?
Multibagger stocks take time to be discovered in the market. After a long wait, it can also turn into a loss instead of exceptional profits. Hence, you should have a dispensable amount in such stocks. Do not invest an amount that you cannot afford to lose in the worst-case scenario.
What are the different types of potential multibagger stocks?
There are primarily three types of potential multibagger stocks. These types are as follows.
Are multibagger stocks risk free?
No, multibagger stocks are not free of risks. Such stocks are volatile and possess very high risks. Hence if you want to invest in such a stock, you need to be thorough with your research.
Who should invest in a multibagger stock?
Multibagger stocks take a long time to ripe returns and also offer great risks. Thus, long term investors with a very high-risk appetite should invest in such shares.