Picking up multibagger theme in 2018 can be easy: focus on these four factors

A multibagger stock is the one that multiplies say 10x or 100x over a period of time giving astonishing returns to its investors. When one starts analysis and invests in the idea, it may not necessarily seem to be a multibagger idea.

But, over a period of time as the opportunity grows, the stock being one among the very few players with all the requisite characters would grow into a multibagger, thereby rewarding the investor for identifying and entering it at the right price point and remaining invested to ride the price movement.

Hence, it is of utmost importance that the investor must have complete conviction in the business model and patience to hold on to the idea till it reaches the market capitalization it is worth of.

Let us now understand few features of a probable multibagger stock idea:

Size of Opportunity:

The first and foremost criterion for the ‘would be’ multibagger stock ought to be growth i.e. it should be operating in the sector which is exhibiting high growth rate and has the longevity to last for decades.

The source of earnings should be clearly identified and plausible. E.g. Hero Motors came up with its bikes when the market was predominately controlled by the licenses issued by Government.

The industry was migrating from scooters to motorbikes and growing at double-digit owing to rising middle class and young population. The stock has given stupendous returns over last 33 years.

Economic Moats:

The Company should have what is called moat i.e. an entry barrier that would prevent the competition to encroach upon its turf. It can be in form of any brand image, technology, patent or IP etc.

This moat gives the pricing power to the company which helps it protect its margins even in adverse conditions, e.g. Coca-Cola and its patented formula, which is kept in a locked vault underneath its headquarters in Atlanta, Georgia, US. No other company on earth that can exactly replicate Coca-Cola’s soft drink formula.

The company does not have to worry about any competitor entering the market with an identical product and grab its market share; many have tried, but they have all failed.

A strong moat offers the company/ franchise’ a competitive advantage over its peers which if coupled with adequate and long-lasting growth opportunity gives a sure shot multibagger, e.g. the IT industry in 2000.

Management Quality:

Investment in equities is like partnering in the business; one has to be very choosy and mindful about whom he is partnering with while making an equity investment.

The quality of management and business is of utmost importance for an equity investor to convert his investments into a goldmine. The management/ promoters are the persons responsible for the day to day management of the company.

A visionary and ethical management will take the business to places, and the same would be true the other way round i.e. an unethical and myopic management will destroy the business and its prospects. Corporate governance is of utmost importance as the business would not grow without good management.

Entry Point:

Oscar Wilde had famously said, “Nowadays people know the price of everything and value of nothing”. It is the price which decides the returns one makes from his investment.

Lower entry price vis-à-vis intrinsic value gives an adequate margin of safety for the investor and ensures higher returns. One must ensure that he catches the prospective investment at its infancy before it is noticed by the fellow market participants.

Having invested at an as low price as possible with a deep value embedded, one has a good margin of safety which would ensure good returns even if the investment arguments or assumptions go wrong.

In conclusion, the multi-baggers are not known at the time of ideation, they evolve. The investor has to have conviction and patience, to hold on to the investment till the business matures enough and the price appreciation potential of the stocks peters down.

Meanwhile, he has to closely monitor the performance of the company and regularly study the quarterly results to check if the company is performing on the designated course and if it does, he can ride the growth and enjoy the fruits.

Disclaimer: The author is MD & CEO, Axis Securities. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.