Multibagger Stock - Characteristics

The term "ten-bagger" was first used to describe high-growth stocks. This word was invented by famed investor Peter Lynch to describe stocks that have doubled the investor's money tenfold. However, as global equity markets grew, we went beyond 10-baggers and are now looking for 100-baggers.   

After all, stocks that can double your money 100 times are unquestionably more valuable than stocks that multiply your money ten times. The word "multibagger" refers to stocks that may multiply your investment, and spotting a multibagger stock can help you expand your money quickly. However, how does one go about identifying multibagger stocks? Can a share market research company help you to identify multibagger stocks?
 
Multibagger - Definition
 
Multibaggers are stocks that provide returns that are several times their cost. These are essentially inexpensive equities with outstanding fundamentals that offer themselves as excellent investment opportunities. Multibagger stock firms have good corporate governance and businesses that can scale quickly.
 
Characteristics Of Multibagger
 
Smaller Companies Grow Faster
 
The size of the company can have a significant impact on how quickly an investor's money grows. Smaller businesses typically find it simpler to become 100–baggers than bigger ones. Essentially, the chances of a firm with a 2% market share attaining supernormal growth are larger than those of a company with a 30% market share. This is mostly owing to the company's lower starting point, as anticipated by market capitalization. This is why, when looking for multibagger stocks, we should concentrate on firms with a market capitalization of less than Rs. 3000 crores.
 
This is, however, easier said than done. While many small businesses have the potential to expand 100x over time, not all small businesses will see adequate growth. As a result, selecting the best firm to invest in might be difficult.
 
Ensuring A Long Growth Runway
 
A longer runway implies the firm has more opportunities to develop and expand, which equates to a significant increase in earnings per share. This is what Reliance Industries has accomplished with its foray into the telecom industry through Jio. With its foray into the telecom market, the business has opened up new development opportunities such as broadband, fiber, satellite telephony, OTT platforms, MSMEs digitalization, Jiomart, a 4G smartphone device, 5G, and much more. The company's expansion into these new markets is likely to help it survive and expand in the future decades.
 
High Return On Equity (ROE)
 
Return on equity is another valuation statistic that reflects a company's potential. ROE occurs when a corporation reinvests its earnings back into the business, resulting in the compounding of returns on investment. A company's ROE is computed by dividing its net income by its shareholders' equity. A high and rising ROE indicates that the company is reinvesting its profits appropriately. This has the potential to boost the company's profitability and shareholder returns in the long run.
 
Formidable Economic Moats
 
The existence of a durable competitive advantage is referred to as an economic moat. A company's competitive advantage might take the shape of intangible assets (patents, IPR, and so on), switching (high cost of switching to a competing brand), low-cost provider (low-cost provider), toll, network effects, cultural, digital, and data advantage. In today's competitive environment, businesses must strive to continuously broaden the breadth of their competitive advantage over time.
 
High Gross Profit Margins
 
A company's gross margin is the value-add provided by its products and services, as explained by the extra margin over and above the cost. It is the revenue that exceeds the cost of products sold per unit of revenue generated. Apple is one of the greatest instances of this, routinely delivering a gross profit margin of more than 35%. Apple has been a 100-bagger several times, and strong gross profit margins are important criteria for identifying 100-bagger stocks.
 
High-Quality Company Management
 
Historically, owner-operator firms had a greater chance of becoming a 100-bagger than agent-manager firms. Owner-operator firms include Reliance Industries, Wipro, Dr. Reddy's Labs, HCL, Dabur, and the various companies under the Tata Group. Current data also supports organizations where the owners are active strategically and are closely connected with the business objectives. Owner-run firms succeed due to better capital allocation decisions, smarter strategic acquisitions, cautious use of borrowing, a stronger focus on cash flow creation, and so on. These activities, taken together, boost a company's chances of becoming a multibagger.
 
Conclusion
 
There are several occasions when you may be tempted to sell your investments and cut your losses, because of the inherent volatility of stock markets. However, investing in high-quality equities and holding the investment until it produces the desired returns is a preferable alternative. So, the success of your 100 bagger approach will be heavily dependent on the companies you buy-in and how patiently you can hang on to your purchases over time. On the other hand, a financial advisor or stock future tips provider can also provide you with the desired information to determine whether the stock could become a multibagger or not. As these people have expertise in these fields their research could be beneficial if we consider them.