Multibagger stocks are stocks that can multiply your money several times over in the long term. At one time stocks of Hero Motor Corp, Lupin, Dr Reddy's were trading at under Rs 100. A multibagger stock means the ability of a stock to multiply returns several times over, giving investors stupendous returns in a decade or so.
1) Begin with studying the industry potential
Renowned investor Rakesh Jhunjhunwala realized the potential of Titan at a very early stage and made huge investment in the company.
He understood that the consumption story that the sector was catering to would play out because of the huge population leaving an enormous potential for the company. Ditto for a company like Hero Motors which has been an excellent multibagger stock idea. Many analysts knew that Hero would do well because of the huge potential for motorcycles in rural India. They knew there existed a huge demand because cars were expensive for many and petrol only added to the burden.
One should begin identifying the potential at an early stage. If you are planning to invest in Hero Motor Corp now, you may have missed the bus, because the share price has run-up sharply and business activity may have peaked. No point in identifying a stock after the potential has been achieved.
2) Look at equity levels
Companies with a huge equity may not be the best multibagger stock idea. In fact, companies with a small equity tend to be multi-baggers because their return on equity is high and EPS gets boosted with a slight increase in profits. Classic examples are companies with a low equity base like MRF, Force Motors, Kaveri Seed etc.
3) Study the debt levels
Companies that have huge debt will hardly make it to this category. The mantra is either they should be debt free companies or at least have a negligible amount of debt to be a great stock idea.
4) Look for future expansion plans
Companies like Sun Pharma and Lupin have become multibaggers in the last few years because they have been able to keep launching new products and grow their market share. Look for companies with a solid expansion or product pipeline and are willing to alter their portfolio to meet the situation.
Take the example of Kaveri Seed. The company which gets bulk of its revenues from cotton seed has realized that cotton acreage is falling. It has quickly diversified into paddy and other seeds.
5) Study the quarterly performance
Look for growth in the net profits of the company every quarter. See if the net profits are being boosted by other income like sale of an asset, currency fluctuation or any other one time income. If the net profits are growing and the company continues to command a low valuation, the share could be ripe for picking. Also, study the dividend track record to see if they have been consistent. If it is possible to meet the management, then you can seek an appointment. In case there is a clarification you can attend the annual general body meeting and seek a clarification.