• HDFC securities
• 27 Jan 2023
• Knowledge Centre

Investing in the stock market is gaining traction with the new generation of investors flocking into the markets. Most novice investors seem to be running behind the multibagger stocks to generate quick returns. Finding the next multibagger stock has been common. But what exactly are these multibagger stocks? A multibagger stock is the one which has the potential to generate significant returns. In this article we will look at the do you mean by multibagger stocks and how to identify them.

What do you mean by multibagger stock?

A multibagger stock is an equity share of a company that has the potential to generate returns which are more than the initial investment made. These stocks have the potential to return at least two or three or more times the initial amount invested. When a stock provides such significant returns of 100% or more than that in a relatively short period of time, it is termed a multibagger.

The term ‘multibagger’ was first coined by renowned investor Peter Lynch in his book ‘One Up on Wall Street’. He referred to the shares which had the potential to generate returns multiple times higher than their cost of acquisition as multibagger stocks.

Multibagger stocks are undervalued stocks which have a high potential for growth. The prices of these stocks usually rally with great momentum in order to discover its fair value and price. These stocks can often be a risky investment in the initial stages as there is no certainty about the returns they might provide. However, investing in multibagger stocks can be attractive for investors looking to build long-term wealth in the stock market.

How to identify multibagger stocks?

Now that the meaning of multibagger is clear, any investor would want to know how to identify multibagger stocks. Multibagger stocks have certain characteristics or factors that can help investors identify these stocks.

• The debt of a company is a significant factor to look at before investing. The debt-to-equity ratio differs from industry to industry, but broadly it should not be more than 0.3, which is considered to be reasonable. This indicates that the company is not reliant on debt financing and is not overleveraged. Companies that generate sufficient revenue to finance their operations can be good candidates for becoming a multibagger.           
• The business model of a company is another important factor to consider as well. Companies that have a monopoly in a certain market with aggressive pricing strategies can see higher revenue generation. Similarly, advanced technologies and research and development facilities can drive business growth.
• Studying the valuations of the companies with the price-to-earnings ratio and the revenue multiples can help an investor identify the multibaggers. A company with a low PE ratio and low revenue multiples indicate that the company is relatively undervalued. Combining this factor with the ones mentioned above can help filter out and identify potential multibagger candidates.

Although identifying and investing in multibagger stocks is attractive, an investor should diversify their portfolio into various asset classes to minimise risk and generate greater returns. Investing in the stock market can be a lucrative way to create wealth but it is critical for an investor to do their own research and analysis before making investment decisions.