Top Five tips to pick Multibagger Stocks
Finding a stock that could become a Multibagger is not difficult but to stick to your research, keep monitoring it and have patience to hold stocks for more than 3 years, 5 years or 10 years is very difficult.
Top Reason why people can not hold stocks for long term period is the temptation of booking profit too early.
Let’s begin the discussion and find out various top traits that differentiate Multibagger Stock from a normal Stock.
It’s always a company behind every Stock
First of all, you should understand that it’s always a company behind any stock and company always engage in a business in either Manufacturing Industry or in Service Industry. So existence of a company is must, much before the existence of stock.
Understanding the business of a company is very basic requirement, when you are trying to find your First Multibagger Stock.
Once you understand the business of the company then your journey become much easier.
It gives you an idea about what company is currently doing and what could be the future of the company
“Never invest in a business you cannot understand” ………. Warren Buffet
Market Cap more than Rs.250 Crores
Market Cap or Market Capitalization of a Company can be calculated by multiplying total number of shares to market price of each share of the company.
To make it simple, it is the total amount you need to pay in current date if you want to buy whole company. It keeps fluctuating with change in the stock price of the company.
It also indicates the capability of a company to sustain in normal time, grow fast when opportunity comes and survive in odd times.
A growing company should have enough market cap to give proper response to all the three stages of business.
Also read: One Up on Wall Street Book Summary & Review
If a company is earning more, year on year and beating its own Net Profit on quarterly or yearly basis in upward direction, you can judge that company is growing and if it is not reflecting in its stock price then it’s just matter of time.
“If a business does well, the stock eventually follows” ………. Warren Buffet
Check out who is on driving seat – Promoters of Company
Promoter is the one who starts a company and work for it from the inception of the company.
Promoter can be an individual or group of people. Nobody knows the company better than promoters. Companies with strong promoters holding shows their confidence in company.
Whenever Promoters decrease their stake in company that is considered as negative for stock but there can be so many reasons why promoters are decreasing their stake such as they are in need of fund, they want to diversify some fund, there may be any compliance (SEBI says total promoters holding can not be more than 75% in a company as there should be 25% Minimum Public Shareholding).
But whenever promoters raise their stake in company that clearly indicates that promoters are very much assured about the future of the company.
Look for those companies where promoters are raising their stakes. You could find a Multibagger there.
Credibility of promoters and management is also very important for a stock.
If promoters are having some legal cases going on or Company has corporate governance issues that can be very dangerous for any stock.
You should always stay away from such companies.
Search for a Low Debt or Debt Free Company
Companies with high debts can survive when things are good but once things are not good for business or there is a slowdown in industry or in economy, then high debt companies fall first as burden of Interest eats up their profit and such companies find it difficult to survive.
Company with low debts or debt free companies can survive in bad times better than a high debt company.
“Companies that have no debt can’t go bankrupt” ………. Peter Lynch
A company with high debt can’t perform better as management can not focus on main business and always remains under pressure for the payment obligation of heavy interest cost on debts.
However, a low debt or debt free company always have better focus on its business and lower interest cost improves profit of the company.
Last but not the least: Valuations of the Stock
Once you are comfortable with above check points about a company then comes the valuation parts
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price” ………. Warren Buffet
Check out the Price to Earning Ratio (PE Ratio) of the company.
It is ratio of how much you are ready to pay for every share to the earning of the company.
You can say simply how much money you are ready to pay against every Rs.1 earning of the company.
Generally, Companies with less than 25 PE considered as attractive and Companies with more than 25 PE are considered as expensive.
But it’s always better to compare PE with other peers (competitors) in the same industry.
Valuations on the basis of PE is also affected by the category of the Stock. For example, Metal industry stocks generally have low PE, as they are cyclical in nature.
There are so many other factors, those affect valuation of a company. We will surely cover those in any other article.
It is very difficult to some up all necessary points you should check in a stock before you buy your first Multibagger and that’s why we will continue writing more such article for giving you in-depth knowledge.
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