Multibagger stocks are equity shares of a company which generate returns multiple times higher than its associated cost of acquisition. These stocks were first invented by Peter Lynch, published in his book ‘One Up on Wall Street’.
Multibagger shares are issued by companies having tremendous growth potential, demonstrating sound management and production techniques. It also exhibits excellent research and development skills of a company, allowing this product to generate high demand in the market.
What Characteristics Should a Company Possess to Generate Multibagger Shares?
Multibagger stocks are associated with manifold returns on investments. Such profits can only be realised if companies possess certain characteristics, such as:
- Advanced research and development skills
Robust growth of a company is associated with a massive volume of sales of its product in the market. To achieve this, quality products have to be delivered by such companies, providing immense customer satisfaction. Considerable investment in research and development of a product has to be undertaken by companies to enlist its securities in the stock exchange as Multibagger stocks.
Start-up companies launching products having tremendous customer usage scope and no close substitutes are likely to generate massive demand in the market. These companies can increase their paid-up capital by issuing Multibagger stocks.
Companies acting as a monopoly or duopoly in the market can also be classified as issuer of Multibagger shares. Aggressive pricing strategies along with entry restrictions, can help companies increase their total revenue generation.
- High growth
You can easily identify Multibagger stocks by looking at the performance of an issuing company. Businesses demonstrating high-profit generation and limited debt liability are top contenders. Multibagger shares have high earnings per share as well, increasing your dividend income on the investment amount. These companies tend to have a low debt to equity ratio, indicating strong financial management skills. Price to earnings growth ratio (PEG) is also high, as the returns on one unit value of a share is several times of the primary investment.
Multibagger stocks are issued by companies having trained and experienced managers. With inefficient management, proper flow is not likely to be maintained in the production chain, as coordination between production and sales chain would be faulty. Several analysts are also employed by such companies to identify optimal pricing level, to ensure revenue maximisation.
Why Should You Invest In Multibagger Stocks?
Multibagger stocks are known to increase your wealth manifold, as the returns on such investments are tremendous. For example, you can invest in such shares for Rs.100, and realise profits amounting to Rs.1000 (ten times the original amount – tenbagger stock).
However, investment in multibagger shares has to be kept in for a minimum amount of time, to ensure extensive capital gains through turnover of funds to final products sold in the market. Funds obtained from listing shares in stock exchange are used for both research and development and production of a product, thereby effectively realising high profits through massive sales volume.
Multibagger stocks in India have to be purchased in bulk for wealth creation of an individual. Therefore loss incurred by an individual would also be substantial in case he/she is caught in a market downturn.
Many investors purchasing Multibagger shares can get caught up in an economic bubble or value trap. Companies trading at high prices might reflect the creation of an asset bubble in the country, wherein the product being manufactured is in high demand due to underlying market conditions. This would lead to massive losses incurred by an individual when the bubble pops and the asset value spirals.
Similarly, value traps are a rising possibility when it comes to Multibagger stocks. Products manufactured by a company might seem like a profitable investment option in the present but would lead to losses in the long term. Investors expect the prices of such shares to rise tremendously in the future. However, this situation does not arise, as the asset does not have any intrinsic value.
Thus, investors need to carefully analyse the financial statements of a company and the prevailing situation in stock markets before investing in Multibagger stocks.
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