What are Multibagger Stocks? Their Advantages and Risk factor

What are Multibagger Stocks?

Multibagger stocks are equity shares of a company which generate returns on different occasions higher than its associated cost of acquisition. These stocks were invented by Peter Lynch and were published for first time in his book 'One Up on Wall Street'.

Multibagger shares are issued by organizations having tremendous growth potential, demonstrating sound management and production techniques. It additionally shows amazing research and development skills of a company, allowing this product to generate popularity in the market.

However, in certain occasions, Multibagger stocks 2019 may reflect an economic bubble developing in a country also, which may have adverse repercussions in the financial markets of a country in the long term.

Analyzing the Multibagger Stocks

Debt on the books

Investors need to watch out for the company's debt to equity ratio. Being overleveraged could present operational risks for the company at a later point as expected.

The debt to equity ratio additionally differs between industries, yet experts propose, broadly, debt to equity ratio should not exceed 0.3. Instead, pay special mind to organizations that are generating a predictable return on capital. In the event that the growth returns on the of capital infusion alone without innovation or ROC increase, the company is probably going to turn into a default risk.

Take a gander at revenue products

A company's revenue different is the estimation of its equity relative to the revenues. In the event that a company has a low revenue numerous, it is considered as a modest proposition. It such a company has strong fundamentals; it might indicate growth potential.

Study the PE ratios

It will make you a stride closer to identifying a multibagger in the event that you study their current price to equity ratio. The PE (price to earnings) ratio is the ratio of company's share price and EPS (earnings per share). One of the indicators of a multibagger is if the PE is growing faster than the stock price of a company.

Take a gander at stocks that are undervalued

Modest valuation may not necessarily be something bad. On the off chance that a stock is overvalued, the venture bubble may burst, and investors may end up being disappointed with the drop in valuation. Yet, on the off chance that a stock is undervalued, and the company has good fundamentals, the valuation could be revised in the future, and the investors may end up profiting by it.

Pick a strong industry

Pick a multibagger in an industry that is hoping to grow considerably in the following five to ten years. On the off chance that the industry is giving indications of having topped out growth-wise or if the industry has strong economic or policy hurdles, it very well can be far more confusing to pick a multibagger in such an industry.

(Also Read: Mortgage-backed securities (MBS))

Search for a company with a strong competitive advantage

Search for a company with what Warren Buffet calls 'economic moat' or a competitive advantage preserved by a company to continue drawing in profits in the long term. The economic moat supports growth and profitability of the company against its competitors. This could be an altogether high market share, low-cost production, scalability, strong brand leadership, patents and intellectual property, R&D investments, solid distribution network and no policy drawbacks.

Stay Calm

For investors to profit by having multibaggers in their portfolio, they need to exercise tolerance. A spot trade on multibagger, however reasonable the price, will profit you, and may not give you higher returns. It very well might be a good idea to have the option to hold on to the winners over the long haul.

Management is the key

See who is leading the company, their management practices, dependability, vision for the company, shareholder and dividend policies, and corporate governance. Search for management that has demonstrated expertise in exploring economic downturns and other business crises effectively. In the event that a company changes its business model too frequently, it very well might be a red flag for investors.

Advantages of investing in Multibagger Stocks

Multibagger stocks are known to increase our wealth multiple times, as the returns on such investments are excellent. For instance, you can put resources into such shares for Rs 100, and realize profits amounting to Rs 1000 (ten times to the original amount - tenbagger stock).

However, interest in multibagger shares must be kept in for a base amount of time, to ensure broad capital gains through turnover of funds to eventual outcomes sold in the market. Funds obtained from listing shares in stock exchange are used for both research and development and production of a product, thereby viably realizing high profits through enormous deals volume.

The Risks associated with Multibagger Stocks

Multibagger stocks in India must be purchased in mass for wealth creation of an individual. Therefore misfortune incurred by an individual would likewise be generous on the off chance that he/she is trapped in a market downturn.

Numerous investors purchasing Multibagger shares can become involved with an economic bubble or worth trap. Organizations trading at excessive costs may reflect the creation of an asset bubble in the country, wherein the product being manufactured is sought after due to underlying market conditions. This would lead to huge misfortunes incurred by an individual when the bubble pops and the asset esteem spirals.

Similarly, esteem traps are a rising possibility with regards to Multibagger stocks. Products manufactured by a company may appear to be a profitable speculation option in the present yet would lead to misfortunes in the long term. Investors expect the prices of such shares to rise greatly in the future. However, the present circumstance does not arise, as the asset does not have any intrinsic worth.

Hence, investors need to carefully dissect the financial statements of a company and the prevailing circumstance in stock markets before putting resources into Multibagger stocks.

Conclusion

Multibagger stocks in India are ideal for investors trying to increase their wealth by a significant amount through capital appreciation of respective securities. As these stocks have an incremental worth on numerous occasions of the cost acquisition, capital gain profits earned are tremendous. However, investors should be prepared to expect associated risks too.

(Also Read: How to Invest in Foreign Stocks from India?)