Multibagger Stock – Can an Equity Investor Identify Them In Advance

Multibagger Stock is one the most loosely defined terms in the stock market. In my opinion, a tag of Multibagger Stock is used by so-called “Stock Gurus” or “Stock Market Experts/Analysts” to create a buying interest in the stock. I observed that most of the times, it is a trap to provide an EXIT route to some big operators. Normally, the beginners in the stock market are trapped in such marketing gimmicks.

On one of the business channels, one of the stock expert suggest one stock before the market opens. He is well known Stock Market Expert. He will label his recommendation as a multibagger stock. Trust me on the day of call, the stock will rise min 3%-4%. He will boast of his recommendation after market hours and next day morning. In my opinion, it is a marketing strategy. Have you ever checked the price of a stock 1 week or 1-month post-recommendation?

What is Multibagger Stock?

Million dollar question is what is the definition of Multibagger stock? In layman terms, a multibagger stock is the one that multiplies your investment minimum two times or doubles it. The biggest flaw is that there is no standard time frame to deliver multiple returns. Assuming, Stock A delivered 200% returns in one year and Stock B delivered same returns in four years. Fortunately or unfortunately, both are multibagger stock :).

Multibagger Stock – A trap

Here i would like to share 3 points

1. Time to enter:

In one of my post, i shared when to enter and exit the stock market. Similarly, to maximize your gains it is important to enter a multibagger stock at the beginning of the bull cycle. The biggest problem with retail investors is that they enter when it is time to exit. To enter at a right time, it is important to identify such stocks in advance else it becomes a sort of bull trap. My favorite quote is “Retail Investors always enter when the party is over”. You may check my post, Why Retail Investors lose money in the Stock market?

As an investor, if i find that the stock has run-up considerably and the steam is fizzled out then there is no point taking the immediate exposure.

2. Marketing Gimmick:

Recently, i was going through an interesting post on the marketing of FMCG goods. It shared some interesting facts that marketers prefix a word “Gold” with the product and the sale of the product increases. I don’t want to name the products but the report cited, the reason being an obsession of Indians with the Gold.

Similarly, in my opinion so called Stock Gurus and Experts are Marketers of a Stock. They prefix the word Multibagger to sell a particular/basket of stock/s. I studied the stock/s projected as future multibagger stock by some well-known stock/investment gurus in 2014 and 2015. Trust me the general pattern is that for every 10 stocks that were projected as multibagger, 4 are delivering negative returns. This despite the fact that markets have gained approx 25% from this year low. Approx 2-3 are at same levels (2% up/down) and only balance 3-4 stocks have delivered double-digit returns.

Only 1 out of 15 recommendation was a multibagger stock. Quite appalling strike rate. I might be wrong in my study but i pulled out data available in public domain. Some stock investors may argue that paid services of these stock gurus are better off compared to free recommendations. I can’t comment on the same as i never availed any paid service.

3. Exit Route to Big Fishes:

Here i would like to share an example of one of the stock that i personally bought. This company was in deep red and i correctly identified it as future multibagger stock. The reason was falling raw material cost for the sector that was a major cost for the company. It run-up from approx Rs 20 to Rs 90 in less than 6 months time.

No one noticed this stock till it touches Rs 65. At this point, all stock gurus started referring it as a multibagger stock. The stock valuation was compared with other stocks in the same sector and projected to touch Rs 200 or Rs 300. It touches approx Rs 90 and then collapsed to near Rs 60 in less than a month. After a couple of roller coasters, it is now stable at around Rs 65. The last 6 month’s returns are almost NIL. By looking at the chart, you can easily conclude such sharp movements are not possible until unless exit route was provided to big fishes and in all probability at the cost of retail investors.

If you would like to know my 5 mistakes as an equity investor then you can check my post, Equity Investor – 5 Biggest Mistakes I should have avoided

Multibagger Stock – Can an Equity Investor Identify Them In Advance

The million dollar question arises, can i as an equity investor identify multibagger stock. The answer can be both YES and NO. Before we proceed, let me clarify that out of 10 stocks shortlisted by you based on criterion we will discuss in this post. Realistically, Only 2-3 will be multibagger stock. The sound stock selection process will ensure that losses are minimized and overall stock portfolio is profitable.

As we checked in the previous section that out of 10 stocks recommended by stock gurus, 4 delivered negative returns. It pulls down the overall return on the stock portfolio. The aim is to shortlist 10 stocks. Out of 10, a couple of them may deliver a negative or stagnant return. The 4-5 stocks should deliver positive returns. You hit the jackpot if 2-3 stocks are multibagger stock.

The turning point in this entire process is to identify a multibagger stock at early stages so that gradually you can wind up positions in 8 stocks and remain invested in multibaggers identified by you. It will ensure a multibagger stock portfolio rather a stock or couple of them. Let’s check out.

1. Be a Good Reader:

I keep highlighting this point in my previous posts. I shared it as one of the Golden Rules for Beginners in Stock Market. On a daily basis, i go through 4 Indian Business newspapers. Besides that, i have subscribed to a lot of newsletters from foreign media. Trust me without going through what is happening around the world, you cannot take the right decision.

One of the example, that i shared in my previous posts was the impact of Brexit on IT stocks. Another example is of international crude oil prices and its impact on upstream and downstream companies. The advantage of being a good reader is that besides identifying a multibagger stock, you can also decide when to exit or enter the stock for routine trading.

2. Shortlist Sunshine Sectors:

The disadvantage of being a good reader is that you are overloaded with information. Being knowledgeable is good but equally important is your conclusion of the information overload in your mind. Moreover, it is not feasible to go through each and every news bit/information on daily basis.

Thus, when you are overloaded with information then you need to apply your judgment on which sectors will do well in future. Now the word of caution is that this decision should not be on the basis on 1 day, 1 week or 1-month reading. You should follow the business news at least for 3-6 months to arrive at any conclusion.

For example, recently GST bill was passed by the Parliament. The business newspapers were gung-ho and carried out half page/full page stories on its impact on various sectors/stocks. Quite interestingly all the analysts are upbeat on logistics companies. After few days, one of the favorite logistics stocks of the analysts dropped by 5% in a single day. Therefore, you cannot rely on others for this exercise.

Half baked knowledge is not good for your financial health. Therefore, to understand the impact of GST, you need to understand what the GST is all about and how it will change the tax structure in India. Only then you can take your own decision to shortlist sectors/stocks. The implementation of GST is almost a year away. In my opinion, GST is golden opportunity to identify a multibagger stock provided you go by your own analysis rather depending on stock analysts.

3. Shortlist Stocks:

Once the sector/s are shortlisted, you should study these sectors in details. In some cases, you might be upbeat on the sector but may not be comfortable to understand the nitty gritty of the sector. For example, i was quite upbeat on a commodity when they were beaten down last year. When i studied in detail, i was not able to catch the pulse of the sector thus i removed it from my list.

To identify a multibagger stock it is critical to catch the pulse of the sector. You can remove the sectors, you are not comfortable with. After that, you can identify and shortlist some of the stocks expected to do well. Word of caution is that it is not necessary that only market leaders are expected to perform well. Within sunshine sectors, there are laggards and non-performers. Here, the prospects of a stock are more crucial.

Also, you can search the latest news about the shortlisted stocks. You can do that on any of the news aggregator sites like Google News. Just enter the company name and you will get all the recent news. You can remove the stocks from the shortlisted list if there is any negative coverage about the company. Recently, i removed one such stock from my list. The reason being, a feud within the promoter family.

4. Fundamental and Technical Analysis of the Stock:

I covered this topic in my post, Fundamental vs Technical Analysis of a Stock. Though stock investors are more comfortable with either of the one but i observed dual analysis help to mitigate the risk. Though the analysis might not be positive for all the shortlisted stocks but always remember that we are in a hunt for turnaround story.

You should also check the recent stock price movement for any abnormal price movement. For example, if the stock has already appreciated by more than 40% in last 6 months then be extra cautious and put a stock on the watchlist. In the case of consistent buying interest then you may enter the stock. Lastly, this analysis helps to exclude stocks those are UP only because of sentiments.

5. Right Time to Invest:

Now you are ready with your portfolio after thorough research. As i keep highlighting that if your timing goes wrong then all the research is a waste. Valuation is a good parameter to decide when to enter/exit the market. To check valuations, you should check P/E and P/B ratios. In all probability, you must have done this exercise during fundamental analysis. Now you need to compare the valuations of the stock market, individual stock, and the sector. I will discuss it in detail in my future post as it is a separate topic in itself. Based on this comparison, i decide whether to enter or wait.

Words of Wisdom:

In the corporate world, there is a famous proverb that “Too much analysis leads to paralysis”. It is not true in the stock market. A sound and thorough analysis helps you to find quality and potential multibagger stock. Here i am not considering or including a stock that is multibagger just because of sentiments or are operator driven. I will prefer to settle at lower returns rather buying such High-Risk Stocks.

It will not be an extrapolation to state that “A single multibagger stock has the potential to change your fortunes”.

Copyright © Nitin Bhatia. All Rights Reserved.