As an avid investor and market researcher, I have come to realize over the years that you do not need every stock you own to perform optimally. Your losses are limited to the investment you made on each stock, i.e., it cannot go below INR 0. Hence, you should aim for 6-10 stocks that give high yields of over 60% annually. The limits to the profits you can gain from them are limitless and hence more than average out the losses you may suffer from other under-performing stocks in your portfolio. And this holds true especially for the young investors who are always hunting for the best out of best stocks.
‘Multibagger’ stocks are equity shares of a company that generate returns multiple times higher than its associated cost of acquisition.
The term was first invented by Peter Lynch, published in his book ‘One Up on Wall Street’. These are stocks that are essentially undervalued and having fundamentals, thus presenting themselves as excellent investment options in the long-term. A stock that doubles its price is called a two-bagger, while if the price grows ten times, it would be called a ten-bagger.
So, multibaggers are stocks whose prices have risen multiple times their initial investment values. Investors looking to build capital with a decent risk appetite aim to get their hands on multibaggers. But the catch is- a multi-bagger is a multi-bagger only in hindsight. At first, it may look like a risky undertaking in an overstimulated market environment.
Where to look for multibagger stocks that are the best for young investors
Your next multibagger stocks will not be from the large-cap stocks that already hold market capitalizations of over INR 2 lakh crores. Instead, look at small and mid-cap stocks that are undervalued and have strong financials and scope in the future. Benchmark indices rallied by up to thirty percent during the March 31-September 30 period aided by strong global liquidity, financial packages, and expectations of normalcy returning to life as India moved from complete lockdown to the ‘unlock’ phase.
There have been multiple stocks that have given significant returns in the rally post-COVID-19. Most of these stocks belong to a few sectors expected to do well during the pandemic, and once the economy starts moving forward. Sectors like Agrochemicals, IT, and Pharma have been the leaders in this rally. While the IT sector is witnessing accelerated adoption of digital technologies post the Covid-19, sectors like chemicals and Pharma are witnessing greater demand for exports as global organizations are looking to diversify their supply chain out of China.
How to identify multibaggers
- Company size – Stocks of big companies should never be included in any list of multibagger stocks mainly due to the sheer size of the company. They will not have big stock moves mostly because they would be stable. They still might gain, but the percentage increase would never be the same as a lower capitalization company with bright prospects.
- Earnings growth – A valuable stock would have consistently increased revenue figures year-after-year.
- Future growth potential – Multibagger stocks are those companies characterized by an ever-growing potential market space and demand for the product/service.
- Committed management – What investors often overlook is the vision and commitment of the management of the company. The people behind the executive decisions of the company make or break a business.
- High margin product/service – This point is pretty self-explanatory in the sense that if each sale of a business’ product or service nets them a higher amount compared to other industry players, then they have the cost advantage, which ultimately results in a competitive advantage that puts them ahead of others in the same market space.
- Return on Investment – A multi-bagger stock will have high earnings available to equity holders as a percentage of total invested capital called the ROI of a company.
- PE ratio – A company having a PE ratio that is less than the industry average points towards the scope of an increase in market price in the future.
My personal favorite – Coromandel International (NSE: COROMANDEL)
As an auditor working with Deloitte, I was tipped by a high ranking official in one of our clients about the prospects of a chemical fertilizer and agrochemical company by the name of Coromandel International. Three years later, the coromandel stock has risen by over 300% and has become India’s second-largest phosphatic fertilizer plant. This stock was one of the multi-bagger stocks I was lucky to happen about.
Peter Lynch, in his book, writes that ten-baggers and multi-baggers can be identified in and around you. From talking to small business owners and identifying businesses that seem to be pulling crowds and generating unprecedented growth. Other stocks in my portfolio that are giving me manifold returns on my initial investment are Reliance Industries Limited (SYM: RELIANCE), HDFC bank (SYM: HDFCBANK), and Jindal Steel (SYM: JINDALSTEL). Solara Active Pharma Science (SYM: SOLARA) has also given a return of 143% from 31 March to 30 September 2020.
Best 5 multibagger stocks for the future for young investors
Keeping in mind the above factors and market trends, we at Uncut Globe have identified 5 of our favorite picks we feel can give manifold returns. Needless to say, tread with caution.
Remember that multibaggers are stocks for the future and may take up to 5 years to yield manifold returns. So keep track of company financials and keep tabs on its share price movements. However, don’t get scared out of a stock as momentary swings in prices are common. What matters is the credibility of the management, market demand and strength of the company’s financials. Do your research on them before you take a position on them and give them time..