Multi-bagger stocks are high-return investments, and they come in different magnitudes. For instance, a 2-bagger stock doubles in price, whereas a 5-bagger stock experiences a five-fold increase.
Undervalued stocks with untapped potential are commonly referred to as multi-baggers.
They provide great investment opportunities at this time. Eventually, the market and the larger investor group will notice these fundamentally strong stocks. This is when the PE expansion usually happens and the stock price reaches its potential.
How do I identify the best shares to buy for the long term?
These are the factors to consider when picking multi-bagger stocks:
- High Growth Potential
Businesses in the sunrise sectors have a large opportunity to grow their revenues and bottom lines.
- Technology Edge or Economic Moat
Companies that innovate and bring better technologies to market have an edge when it comes to business. This innovation and technology, if hard to emulate for other firms, create an economic moat for the company.
- Capable and Experienced Management
The most underrated part of a business is the management of the company. The experienced and capable management will drive sustained profitability for the company.
- Capital Efficiency
The first rule seeks to identify companies able to generate consistently higher returns on their shareholders’ equity going forward. The idea is, the more profitable the company gets, the more value it will create.
- Low Leverage
Debt is a liability and comes with an obligation to pay interest periodically. This often weighs on the cash flows of the company when the going gets tough. Low leverage is a blessing. Debt is a liability but if used in the right way can propel a business.
- Growing Profit
A consistent rise in revenues and consistent or increasing profits are signs of a healthy business.
- Strong Promoter Holdings
Higher promoter holdings are a sign of confidence that the promoters of the company have in the business. The promoter pledge needs to be as low as possible.
How to pick a multi-bagger stock? / How to find multi-bagger stocks?
A very integral part of finding future multi-baggers is identifying stocks with the right ingredients for growth at the correct valuation. Of course, finding a multi-bagger stocks is an investor’s dream, and it takes years of patience while the markets realize the stock’s worth.
