Business

How to identify multibagger stocks for 2022 and beyond

You probably won’t believe us and that’s okay. We understand the skepticism.

But it can. There’s a way.

It is not a guaranteed method or a surefire strategy that will make you rich. But it will work if you give it enough time.

And yes, it is very simple to understand.

This method only works when you are willing to open your mind to future possibilities and have patience.

Continue reading to know more about invest in multibagger stocks and how to identify them early.

Identify Multibagger Stocks

Tata Elxsi, The Tanla Foundation and Alkyl Amin.

Sure, these are the top multi-handbag inventory stories that come to mind over the past few years.

If these three don’t make the list, it could be other stocks like Balaji Amines, HLE Glascoat, Bharat Rasayan or Supreme Industries.

All of these stocks have delivered phenomenal gains over the past 5-7 years.

And I’m not saying 2-3x increase, but 8-10x increase.

But do you know what these companies have in common? What separates them from the thousands of others in the stock market?

Well, that’s the recipe for finding the next multibagger stock for your portfolio.

In this article, we analyze seven companies that have been the top wealth creators in the Indian stock market over the past 5-7 years.

They all share seven characteristics. Remember our previous editorial titled ‘The power of 7‘?

We’ll see the power of these seven traits and define multibagger stocks for 2022 and beyond.

Start.

No. 1 competitive advantage

First things first…

To avoid any confusion, we have recorded the benefits these 7 companies have achieved over 5, 7 and 10 years.

Here’s how the grid looks…

The journey is slow but fun

Company Change % in 5 years Change % in 7 years Change % in 10 years
Tata Elxsi

902%

1.237%

7513%

Tanla Foundation

2.841%

8.742%

23.003%

Alkyl Amine

1.521%

2.256 %

16.770%

Balaji Amines

722%

3.066%

7,903%

HLE Glascoat

2.417%

4.718%

14.123%

Bharat Rasayan

355%

1.589%

9.605%

Supreme Industries

75%

197%

854%

Source: Equitymaster

Back to the characteristics of multibagger stocks…

The first thing you need to look for is the company’s competitive advantage, or lack thereof, in its industry.

The quality of the underlying business must stand the test of surviving perfect storms and emerging stronger than ever.

Look for businesses that will be relevant decades from now. Think of the brands of FMCG companies or other proprietary stocks that continue to thrive today.

In the end, if the quality of the business continues to come first and the company has a lasting competitive advantage, the time to sell the business is never.

Over the years, Tata Elxsi has focused on high-growth emerging fields and enjoys the go-to advantage in the areas of artificial intelligence (AI), electric vehicles (EVs), semiconductors, Internet of Things (IoT), etc.

Alkyl Amines and Balaji Amines both have the advantage of being industry leaders in the fatty amine segment.

Tanla Platforms has come a long way to become a monopoly in the OTP market.

So the first thing to look for is the durability of the business and its competitive advantage.

#2 Sales and Profitability

Now this is an obvious characteristic.

If you take a close look at the world’s best businesses, you’ll notice they’ve reported consistent sales and profits and growth over the years.

This is the second and important feature to look out for when identifying high-yielding stocks.

Take a look at a few tables below that show the sales, profits, and growth of the seven companies:

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As you can see, minus 1-2 years for some companies, most report growth with each passing year. That too, over a period of 10 years.

So it’s no surprise that these companies are among the biggest wealth creators in the history of the Indian stock market.

#3 Market Cap

Finding multibagger stock is no easy task. The listed universe includes thousands of companies. Filtering out a selected few from them is like finding a needle in a haystack.

That’s why you have to have some set criteria to find these hidden gems. One of those criteria is low market cap.

Large companies are known by many investors. But it all starts from scratch when it comes to trading with low stock prices and low market capitalization.

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What’s interesting about this list of companies is that they all started out as companies with less of a market 6-7 billion. With one exception.

These companies are ignored by investors and institutions because there are not enough shares in the market. Low trading volume.

But as soon as these companies got noticed, institutions and investors piled into the stock.

Alkyl Amines have a smaller market value 1 billion, with only 11,000 shares traded daily during 2010-11.

Same goes for Tanla Foundation, Bharat Rasayan and HLE Glascoat. All have low market value.

As the years go by, these stocks have multiplied in business profits and profits. What followed was a massive rally.

#4 Debt

Stock Screening, an important and obvious metric one should consider is a company’s debt review. Too much debt can sink a company.

In financial terms, leverage means the ratio of a company’s borrowed capital (debt) to the value of the company’s common stock (equity).

The two ratios to consider here are the debt-to-equity ratio and the interest coverage ratio.

An important point to note is that a high level of debt cannot determine a company’s ability to service it. It is more likely that companies with high debt can generate strong cash flow to cover their interest expenses and pay off debt comfortably.

Therefore, a better way to determine risk is to check the interest coverage ratio. A higher coverage rate is better, although it can vary across industries.

Let’s take a look at seven companies and how they’ve performed on both of these metrics.

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All of these companies have low debt, and in the event that the debt level exceeds equity, they have a good interest coverage ratio.

#5 Free cash flow

Free cash flow shows how much cash the company actually has at its disposal.

When a company needs to pay off debt or pay dividends, it needs cash. If a company has a large amount of excess cash, depending on the industry, it can increase production, buy back fuel, or return money to shareholders.

While this may sound like a simple point, it needs to be considered in depth. It should be on an investor’s ”things-to-know” list.

Here’s a look back at the free cash flow of seven companies over the past few years.

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A few companies have reported negative free cash flow for a number of years, but most have reported positive numbers. This demonstrates that free cash flow is important when identifying multibagger stocks.

#6 Organize Promotions

The extent of promoters’ equity holdings is important, especially in India, where many businesses are family owned.

Equity level serves as an indicator of promoters’ confidence in the business as well as the strength of leadership control within the company.

Over the years, seven companies have acquired a high percentage of shareholders.

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As shown from the table above, in most cases the advertiser holdings exceed 40%.

A company with a very high percentage of promoter equity usually represents a vision where promoters see a bright future for the company. In turn, they plan to benefit from its good growth.

The promoter has all the information about the company. If they are investing, it shows they are confident about the company’s prospects.

#7 Return on Equity (ROE)

Finally, we have return on equity (ROE).

Profitability ratios represent a company’s ability to generate profits for its shareholders. Investors look at these ratios to get a clear representation of its performance.

ROE tells us how much profit the company generates for each rupee of its equity. For example, a company with a ROE of 10% means they make a profit of 10 for each 100 equity.

It’s no surprise that all seven stocks have performed well on the ROE front and are consistently improving.

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Examine the company’s ROE and other profitability ratios for several years and analyze its components one by one. It will help you better understand the profit and loss statement of the company.

The easiest way to find secure multi-use warehouses

It is done.

A proven, simple and effective technique for multibagger stock identification.

Look for stocks that share these traits and you’ll most likely come across a multibagger in the making.

Please note to you, Mr. Market has a way of rewarding stocks in different ways. Multibagger profits can come in a year or six months.

You might also be lucky enough to dive into a stock like Adani Power, which delivers a 145% return in less than a month.

But here’s what you need to know about these stocks. It takes patience and a lot to achieve such achievements. We’re not talking a year or two here, but more than that.

You will have periods when nothing spectacular happens and think you would be better off without this stock. Instead of being bored, get comfortable with the wealth you will earn in the long run.

To make things easier for you, we’ve rounded up all of our knowledge about multibaggers, as well as four proven methods for multibagger stock picking, in one easy-to-read free guide.

Happy investing!

Disclaimer:This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is provided by Equitymaster.com

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