Everyone needs to have Multibagger shares in their portfolio and looking to find such share through various available sources.   When we talk about Multibagger share, there are certain indications which will talk about the share to be a Multibagger – the quality of Multibagger shares.  No share become Multibagger in a month or year.  A stock will take long time to become Multibagger.  After buying the share, which may have all the qualities to be a Multibagger, investors are happy to book at 50 -60% profit in short span of time.  Here comes the investors’ behavior – Requirement of Multibagger investor.  So, to get the Multibagger gain in a share there are two requirements – first the “Quality of Multibagger share” and the second one is the “Requirement of Multibagger Investor”.  In this article, we will look the “Quality of Multibagger Shares”.

• Multibagger are the shares of companies which have financially strong and good business model which will deliver good financial results.
• The company must be able to deliver good result continuously over the period of time i.e., sustainable growth
• To reap the benefit of Multibagger, it might take 10 – 15 years time. Multibagger doesn’t mean getting 100% gain, as the name says Multibagger will deliver manifold return and hence holding for a long period time is a must.
• Understanding the business is the foremost requirement. Unless an investor understands the business of the company in which he invests, it is difficult to keep for long time.
• Small and Mid-cap companies are giving most Multibagger shares, this doesn’t mean large cap companies can become Multibagger.

Important factors to keep in mind when looking for Multibagger shares:

• Turnaround stocks: Some companies were having poor financial results in the past and recently started to show improved financial results. When these companies started to publish positive result, we call it as turnaround company.  Obviously share price of these companies might be trading at lower P/E compared to its peers. Once the company started to show positive results it must be bought for long term keeping an eye on each quarter results.  If the positive result trend is not continuous the share can not become Multibagger.

• Hidden gems or shares which are not familiar in the market and trading at lower price. There may be some companies having good financials but the price did not increase as it is expected to be (peer comparison will help to find such shares).

• Change in the Organization: Any change in the structure or management may have potential for the company to grow and shares of such companies can be Multibagger.

• Economic Moat: By Economic moat, we mean the competitive advantage of a company over other companies in the same business.  This might be the brand name of the company’s product, strong distribution network for retail companies, requirement of huge investment which makes barriers to entry, etc.

Finding Multibagger stocks:

Finding Multibagger stock is possible.  It is not only finding the stocks but to hold the stock for a reasonable long term is also important. If someone is in trading shares for at least 5 years, they could have come across with some Multibaggers.  But the decision to buy and holding for long term is also equally important.  An approach to shortlisting the potential companies is to be followed.  To be considered as a potential growth company, it must satisfy the following financial norms:

• RONW > 15%
• Sales and Net Profit Growth is not less than 15% over the last three years
• Net Profit must be at least 10% on sales
• P/E ratio is less than Industry P/E.
• Free Cash Flow (FCF) is positive for at least last three years. (FCF is calculated by reducing the fixed assets purchase from the operating cash flow)
• Company is having continuous sales growth for each of the previous five quarters.

If a company satisfy these norms, then detailed analysis can be done to select the company for investment. Click here for the Detailed Analysis.  In addition to the quantitative analysis, other qualitative aspects are to be considered:

• Promoters shareholding also to be considered. Before investing in a company, details of promoters to be gathered. Promoters usually hold higher number of shares since this is the company developed by them. If the promoters are increasing their stake in the company i.e., buying additional shares it is a sign that the promoters are having positive hope on the company.  Promoters know very well the future plans and potential of the company.  Hence if promoters are increasing stake in the company, it is a good sign that the company will delivery good results in future which will have positive impact on the share price. On the other hand, if the promoters are reducing their stake in the company, it is not a good sign and better to be away from such company shares.   In some companies, the promoters are pledging their shares.  This is also not a good sign depending the % of shares pledged. If the promoters are pledging huge % of their stake, then it is advisable to be out from such company shares.

• Dividend payment: A good and investor friendly company will take care of its shareholders. This is achieved by paying dividend regularly.  Hence dividend paying companies are preferable than companies not paying dividend.  Dividend payment also indicates that the company has enough cash flow to distribute it in the form of dividend.

• Collection of Trade Receivable:  Credit is inevitable in today’s business.  How can we analyze the company’s credit collection efficiency? This can be found from the balance sheet of the company.  Comparing the % of sales outstanding at the end of the year will tell us.  There are formulas for calculating the collection period which may be complicated but if we take the % of receivable over sales will provide an insight. This % must be in the same range over the years.  If this % increasing over the years then it shows that the company has difficulty in collection, this will lead to financial difficulty for the company in its day to day operation which might lead to borrowing that will cause interest payment and ultimately the net profit will be down and as a consequence EPS will be down…!!! Another impact of inefficiency in collection is that the company may find it difficult to distribute dividend.

• Investment made by the company: Even though, a company satisfies all of the financial and other requirements, still the investment made by the company must be looked in to.  Some organizations will invest in other companies (called as investment in subsidiaries). The investment will be classified as quoted and unquoted. If the subsidiary is not listed (unquoted), reviewing the financials of such subsidiaries will be difficult and we will not be able to see the result of such investment. If that subsidiary is related to promoters, care should be taken before investing.

• Corporate Governance: Corporate governance is the system of rules, practices and processes the company is required to follow. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.  An organization with good corporate governance (eg., TCS, Infosys) is expected to grow well than an organization with poor corporate governance (Satyam Computers).

Click here to read requirement of Investor “How to become a Multibagger Investor”

Note: Companies mentioned in this article are only for reference and not for investment / trading.