While investing in stock markets, we always hear a lot of stories about wealth building in companies like Infosys, Wipro, and many more. I always got excited and wish to build such wealth so that I can also afford a Rolls Royce. Investing in stock is actually investing in that business. Better business prospects ensures better returns on your investments. When the returns year on year are higher then normal returns, then it is said to be a growth story. However, we as investor always keep looking for Multibaggers. So let us discuss few characteristics of Multibagger Stock and how to identify them
What is a Multibagger stock
Multibagger signifies such a higher rate of returns that stock multiplies in value in small period of time say few years. In context to India Stock Market, it is a stock with IRR (Internal Rate of Return) in the range of ~50% to ~200%. So when we compare these type of returns with any other type of investment these are abnormally high.
Why such a high returns….is it safe
Higher returns are always due extraordinary performance, say the sales of a company is increasing multifold which is beyond expectations and investor always wish to be part of such a profitable venture. Sometimes such higher are also due to increase in asset value like land bank, patents, ability to manufacture a drug, or any such USP of the company which is expected to be high demand. These expectations creates a bull fight among investors and prices starts increasing.
When we talk about the safety, we should just dig into our text books again and remember returns are always proportional to risks. So higher the rewards does means higher the risks. A company which started selling a huge quantity of medicine may not be able to sustain those sales may be due to reduces cases of disease or increasing competition or Govt. regulations.
How to identify a Multi bagger stock
Identification of a Multibagger is the only work you are doing to get great returns on your capital, so you should be ready for spending sometime with patience. Also your ow research will make you little more confident and keep you safe from fake stories or traps in the market. When we talk about identification, it is important to identify them in the earlier stages, track them for few months for confirmation and then only invest.
It is just like a person who come to Film city for becoming a Hero like Salman khan or a kid who just came out from cricket academy and wishes to become like Sachin Tendulkar. So you should be sure of your capability to identify and trust your vision while doing that. Few of the parameters to identify multibaggers stocks are stated here
1. Newer Industry or Niche operation
Normally such a business will not be a part of any large or broad industry rather it will be operating in a newer industries or emerging sectors. Most likely these companies will have a niche and they will be battling for their survival in the area. Their expertise in specific area make them different from other but they look forward to opportunity in various markets.
2. Business for a cause
The survival of the business is only possible when it has a cause. Products that is useful or make life better for the people are sold quickly. Technologies which redefine the way of doing things becomes the game changer. Sometimes the same old product is introduced in the newer markets or community and it becomes the instant hit.
3. Revenue disproportionate of fixed assets
The business where revenue are irrespective of fixed assets derives or does have more chances for better valuation in the market. Such business has initially very high fixed assets as compared to turnover however later it is just the push to revenue without worrying for installation or setups. It may be difficult for an investor in the first few of operations where fixed asset are attracting very high depreciation however later on the increase in sales keeps adding to profits.
4. High Gross margins
Normally Gross margins should be very high for a stock to give better returns. The high revenues along with very low cost signifies the monopolistic environment or the extraordinary specialisation / reputation of the company. The customers of such companies are finding value in their product as such ready to bear any cost for the product or services. When these type of product reaches to broader markets, the potential becomes tremendous.
5. Change in Management Culture
We often see few companies which were operating from several decades suddenly start hitting the upper circuits. Normally such companies undergo a change in management culture due to change in the board. These changes could be due to inheritance from father to son, takeover or hive-off or may be joining of a professional team on the top. Such triggers often change the way people (employees and customers) look upto management.