5 Key Factors to Consider While Picking Multi-Baggers

Published by Sharekhan Education | July 3, 2020

5 Key Factors to Consider While Picking Multi-Baggers

Multi-bagger refers to a stock that delivers more than a 100% return on our investment. Imagine if you had used just 5% of your capital to buy Asian Paints in the year 2000 at Rs. 20 per share. You would have a 130-bagger in your portfolio today. But how do we unearth such long-term winners? Here are some key pointers to consider when looking at which stocks can be multi-baggers over the next few years.

1. Potential market opportunity: Future revenue growth is an essential factor to consider while evaluating – how big the company would be in the future. As an astute investor, one should focus on the total addressable market and how much of the market share can be acquired in the coming few years.

2. Clear path to profitability: Besides increasing revenue, companies should generate robust profits, free cash flows, margins, and return ratios. For fast-growing companies that are not yet profitable, look at gross margins. A company with high gross margins will be more likely to earn a profit during its mature state.

3. An enduring moat: To fulfill its potential, the company should have the capacity to fend off its competition. A moat can come in the form of a network effect, a superior product, a patent, or other competitive edges that a company may have over its competitors.

4. Management that can execute: Potential is one thing, but can the company implement its plans? It is here that the management comes into the picture. The top executives need to have a clear vision and execution plan.

5. Potential to reach a high market capitalization: A company’s growth strategy is then evaluated with the best in the industry to gauge its potential to reach high market capitalization. It is of no use buying into a company whose future earnings have got factored in its market value. A company with low or fair valuation along with the above mentioned pointers has a high potential to give multi-bagger returns.

Multi-baggers can be the difference between a market-beating portfolio and an average one. However, finding a multi-bagger is not easy. The company needs to tick many more boxes. And even so, there is always the risk that the company does not fulfill its potential. As investors, we, therefore, need to consider the risk-return profile of a company before deciding if it makes sense for our portfolio.

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