How to find a Multibagger Stock? | Billionaire’s Investing Secret ~ The Finance Magic – Stock Market | Personal Finance

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How to find a multibagger stock

Multibagger
stocks are equity stocks that have the potential to give more than 100%
return in a shorter period as compared to its peer companies. Usually, these
stocks are not in the limelight as they might be recently listed or are not so
popular in their respective industry due to their limited operations.

Finding
a company that has the potential to scale its business in a shorter period is
all it takes to be a millionaire. We have compiled a “Complete Checklist” to find
such Multibagger stocks.

*QUALITATIVE
ANALYSIS*

1. Business Survival

Invest
in business, not in stock, i.e. one should not invest in companies that he
cannot understand. It is very crucial for a business to survive in difficult
times, no matter whatever the event is. An event can be a health crisis, sudden
economic downfall, unfortunate bubble blasts (such as the Dot-com bubble, sub-prime
crisis, etc), economic recessions, any political event (such as US-China Trade
War, etc).

A company doesn’t have to post profits even during difficult times
but the primary concern is the survival of a business. For example, FMCG
companies would be the least hit even during tough times (such as COVID-19
Pandemic), as they are into the consumer segment and their products meet the daily
needs of the consumers.

Earlier
there were only FMCG companies but today there are a lot of other businesses that
we consume on a day to day basis are food, pharma, chemicals, agriculture, and
many more. Try to find out such companies who will be able to sell products or
services despite any economic issue. 

Also Read on FinMedium:  TATA Elxsi Stock Analysis

2. Sustainable growth potential

The
company should be adaptive to changes i.e. they should develop new techniques
and focus on product innovation and optimization. The company should have an achievable
goal. An investor can find their past performance and various branding strategies
used by the company in their recent annual reports (MD&A Section).

3. Management should be visionary

Management
are the pillars of any company. A good and experienced group of people can lead
a company in the best interest of investors. Pick up any company that has faced
financial issues or was dissolved in the past or had a negative market image, all
of these issues were only because of fraudulent and incapable management.

Do
a thorough background check of the Promoters, Management, Key Managerial Personnel
of the company. (You can just google “Mr. X fraud”, and if there are any news
related to this would show up)

Besides, management should be ethical and have a good image too.

4. Promoters interest in the company

Usually, a higher promoter stake is always considered a positive sign for the company. A
higher stake shows, the promoters are confident about the company’s future and
vice versa.

Check
out the promoters holding in the last 10 years, and find out the trend, if it
is increasing it’s a positive sign and if reducing than it’s a red signal for
investors (One should stay away from such companies because if the promoter
itself is not sure about the company’s future than how come an investor could
have trust in it.)

Also Read on FinMedium:  Will The Aviation Industry Surely Take-Off After COVID?

Promoters
pledging should be either zero or minimal.

PS:
The above rules do not apply to the Professionally Managed Companies, as such
companies have zero or negligent promoter holding. (we will talk about What
are professionally managed companies and What are Promoter Managed companies?

in detail in our next article so stay tuned and Subscribe us to be updated.)  

*QUANTITATIVE
ANALYSIS*

5. Zero Debt Company

Debt
is becoming a dirtier word at an individual as well as at the corporate level. A
company should have zero or minimal debt, as it would give them an edge over
others in terms of minimizing their cost and increasing their returns.

If
a company has debt than look at the trend in the last couple of years, and find out
the answers to the below questions.

    1. Is debt increasing?
    2. Is the company’s profitability affected due to debt? 
    3. Is the company purposely not repaying debt? 

If the answers to the above question are YES
than STAY AWAY FROM SUCH STOCK

Lower
the debt, better the valuations.

6. Increasing Cash Surplus

A
company’s ability to create value for shareholders is determined by its ability
to generate positive cash flows, or more specifically, maximize long-term free
cash flow (FCF).

Analyzing
cash flow along with PAT would give you a clear picture of How efficiently the company
is able to convert their profits into cash?

7. Equity dilution

Lesser
the equity dilution, better will be the valuations.
Management
should avoid equity dilution at all times. To improve the liquidity, equity
dilution is good sometimes, however it should be only when the proportionate
growth is visible.
Also Read on FinMedium:  Tools of the Modern Day Investing Process

8. Consistent Dividend

 

A
company should be consistent in giving dividends. Why so?
For
Example, Company X gives a 5% dividend every year, so in this case, the market sets
a benchmark for company X and expects that the company would give more than 5%
or at least a 5% dividend in the upcoming Fiscal Year. And if for any reason the
company is not able to meet these expectations, it is considered a negative
sign by market participants and it is believed that the company is not able to
generate sufficient returns.

9. Price to Earning

Low
price-earnings multiple indicates the stock is comparatively undervalued with
respect to the industry. With the growth in earnings and with every new milestone
achievement, PE gets re-rated and then there is usually a multiplier effect on the stock price.

10. Branding

If
the company is having its own growing brand then it’s a huge plus point, and
even if they don’t own but are associated with some huge brand name which will indirectly
increase the goodwill of the company. Read
annual reports and news for getting better insights on such brands.

11. Lower the equity capital, EPS growth can be
far better

A company doesn’t need to be good only if it has low equity, but low
equity capital companies with strong fundamentals have some sure shot advantage
over others.

Lower
the equity capital, higher the EPS, higher the valuations.

PS: Find companies having equity capital less than 15 crores.



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