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Six Recommendations to Follow While Selecting Multibagger Stocks

by Kristen White Blogger
A major factor that generates value in the Indian stock market is consistent growth across distinct market cycles. When we consider the stock market in India over the past few years, we’ve notice distinct scores of multi-baggers in the stock market. Even if we consider a short time frame, there have been innumerable incidences where mid and small-cap stocks have multiplied revenue many times on their way to convert into large-cap stocks.

So, how to select the best multi-bagger stocks? To let you make a wise and well-informed decision, here we share some great multi-bagger recommendations from the industry experts.

A Good Combination of Non-Cyclicality and Growth

It is essential for stock to create consistent growth in the economic market. Most of the multi-bagger stocks are usually high growth entities in the non-cyclical businesses. It is quite difficult to identify a multi-bagger in a commodity business such as aluminium, oil, or steel. 
Usually, the wealth of such companies is disintegrated by the economic cycles. Also, it is difficult for a utility company to become a multi-bagger. It is because it functions in a highly constricted atmosphere.

Efficient Utilisation of Capital

You can approach the returns from shareholders in different ways. There are numerous measures of utilising the capital, but two important measures are Return on Equity and Return on Capital Employed. The Return on Equity or ROE measures the shareholder's return and is a vital investment parameter. A consistently low Return on Capital Employed or ROCE symbolises that there is something wrong with the company or business.
A few of the best wealth creators possess extremely high ROE and ROCE relative to the entire industry. Mostly, companies that have high ROE and ROCE can also generate positive free cash flows regularly for which the markets are interested to pay a premium.

High Corporate Governance Standards
A huge emphasis is placed by the market on corporate governance. And the market is interested to pay a huge premium for it. Some of the important parameters of companies holding good corporate governance are:
A company must have high standards of disclosure of information related to its shareholders. In fact, if a company is ever in doubt, it must disclose the same.
Smooth alignment of management with the minority shareholders.

A Balanced Asset to Debt Model Is the Key to Wealth

A prominent reason that makes it quite difficult to identify multi-baggers from industries such as infrastructure, utilities, and metals is that they hold a capital intensive model. Because of their capital intensive business models, the companies result in a very low return and high leverage ratios.
When the leverage is high, it increases insolvency risks in the cycles when economic growth is down. However, when the debt is low, the complete issue of the financial risk overcomes easily. 
It is not essential that a company must have a zero-debt ratio as there can be some amount of the leverage that can actually enhance the returns for shareholders. Alternatively, if the leverage is very high, it may actually end up completely destroying the value to shareholders.

A Company with a Good Reputation May Not Always Be the Best Bet

There are companies with an impeccable reputation. But it is not necessary that such companies always offer a good stock to purchase. There can be various reasons for it. Mainly, it could be because of the fact that most of the related triggers are already mentioned in the price. For this reason, the potential for future growth does not justify its valuations.
One simple way to assess this situation is to assess the PEG ratio. It is the ratio when PE is divided by sustainable growth. With this ratio, you can measure the overall valuation relative to the growth.

But in addition to this, one must consider other important parameters too. These parameters are returned ratios and other brands that the company has created. Such parameters can help you determine the potential valuation in a long way. 

Check for the Company’s Future Growth Potential

Moreover, you must assess the future growth potential of the company. You must gain knowledge about the industry that the company is operating and what are the future growth prospects of that industry. Check services and products offered by that company. In addition to this, you must check whether its offerings are currently in demand or not. This way, you can have an idea of how the company will perform in the future.

Also, you can check if the company has any new product or plans for expansion. It is a great way to gain knowledge about the financial condition and future prospects of a company. It is because if a company has great plans for expansion and the same succeeds then this results in a huge increase in their share price, which will ultimately reap benefits.

Though it is not guaranteed that the above-mentioned parameters can always help you identify the best multi-baggers, but sure they can go long way to help investors avoid investing in companies that may end up in losses and destructions.
 


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About Kristen White Committed   Blogger

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Joined APSense since, August 19th, 2016, From Chicago, United States.

Created on Jul 24th 2019 08:44. Viewed 351 times.

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