What are Multibagger Stocks: Defination & Characteristics | Espresso

What are Multibagger Stocks?

Keeping your money idle in a savings bank account is of no help. Yes, you will earn a bit of interest from your bank, but why not use it to make more money? Investing your money in different instruments may help you generate profits and earn more money. In other words, you should let your money work and earn for you.

Published on 15 June 2022

However, with the availability of plenty of options, it’s easy to become confused while hunting for the right investment instrument. Although they carry a fair bit of risks, you can try your hands in the stock markets. With diligent and smart investing in stocks and shares, you can earn very high returns on your investments.

In reality, there is no limit on the profits that you can gain by investing in the stock markets. And if you get to invest in a multibagger stock, your investment could get multiplied by several times. This statement might feel surreal, but it’s true. In this article, we will discuss what are multibagger stocks, their characteristics, and how you can identify them. Let us get started.

What is Multibagger Stocks?

Multibagger stocks are those stocks that have given returns that are several times their actual costs within a short period. These stocks are essentially undervalued stocks issued by companies with strong fundamentals, solid management techniques, and high growth potential.

Let’s understand what are multibagger stocks in this way. Suppose a stock has doubled its price within a short period, i.e., say three months. Such a stock would be known as a two-bagger stock. Similarly, a stock whose price has increased by 10 times within a short period would be known as a 10-bagger stock.

Now, multibagger stocks are those stocks whose prices have increased by multiple times their initial investment values within a year or so. So if you happen to invest in a multibagger stock, your investment value could increase by multiple times within a short period.

What are the Characteristics of Multibagger Stocks?

It can be a very difficult task to determine if a stock can become a multibagger in the future or not. However, there are some common characteristics that these stocks possess. They generally belong to the companies that have the following traits:

  • High growth potential

All multibagger stocks are issued by companies with high growth potential. Companies with very limited debt liabilities and high-profit demonstrating businesses are top contenders to release multibagger stocks. These companies also have high earnings per share (EPS) values, thereby increasing your dividend income on your investment amount.

You can look at the quick ratio, the current ratio, and the price to earnings growth (PEG) ratio of a company to determine its growth potential. Companies with high current ratios and Price to Earnings Ratio (PEG) ratios usually have growth potential, and hence, their stocks can deliver multibagger returns in the future.

  • Exceptional research and development skills

An exceptional research and development team is necessary for a company’s robust growth. A company grows when its sales figures grow, which happens when it starts releasing a high quantity of its products in the market. And this is only possible when a company can produce high-quality products to achieve optimum customer satisfaction.

Companies that invest considerably in the researching stocks and development department tend to grow more than others, and hence, stocks of such companies are more likely to deliver multibagger returns.

  • A large customer base or market share

A company with a large customer base or market share is only expected to expand its footprint in the future. Even if it doesn’t expand, it can keep generating high profits owing to its monopoly or duopoly in the market. If such companies decide to dissolve their equity ownership by releasing their Initial Public Offerings (IPOs), their shares could turn out to be multibaggers in the future.

Start-up companies that are dealing in products that have tremendous customer usage scope with little or no substitutes in the market can also capture a huge market share within a short period. Stocks of such companies can, therefore, become multibagger stocks.

  • Excellent management skills

Companies with highly trained and experienced managers are more likely to issue multibagger stocks. Efficient management is very crucial for the maintenance of the production chain and to ensure that the coordination between the production teams and sales teams remains top-notch.

How to Identify and Invest in Multibagger Stocks?

As mentioned, it can be difficult to tell which stock would deliver multibagger returns in the future. So, it’s not easy to identify and invest in such stocks with precision. However, what you can do is select ten to fifteen stocks of companies with the above-mentioned characteristics and create a well-balanced investment portfolio of such stocks.

Even if one of your selected stocks goes on to deliver multibagger returns in the future, you could get the full worth of your investment.

To Conclude

Investing in multibagger stocks is nothing less than a lottery. Your investment can get multiplied by several times within a short period. However, identifying a multibagger stock isn’t as straightforward as it may seem. You need to conduct your research and analysis. You should also look at a company’s fundamentals, past performance, PE ratio, and revenue sources before making any investment decision.
Also Read: What is Fundamental Analysis?

Chandresh Khona
Team Espresso

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