For finding multibaggers, I normally use famous SQGLP formula . This formula has 5 different elements which have their own role which plays its part in making scrip as multibagger. `Q`, `G` and `P` are three most important elements out of 5…. Pl find below brief explanation of all elements :
1 – (S) Size:A potential multibagger company should be small in size (based on sales and market cap) and relatively unknown. Small size enables high growth due to low-base effect. “Unknown-ness” leaves room for significant valuation re-rating.I personally prefer companies which have mcap less than 1000cr..(At the time of investing) . Smaller the size of pick you identify the better is the chances of turning into multibagger. Remember, smaller size companies need to be screened very ardently in all aspects.
2 – (Q) Quality :There are two aspects to Q in SQGLP – (1) Quality of business and (2) Quality of management.Quality of business and management are absolutely essential for long term success.Right now I am playing export theme…(All top holdings benefit with strengthening dollar)Logic: Dollar strength will increase profits of these companies. It will also lead to better profit margins.Those profits sooner than later will take care of the stock price.
3 – (G) Growth:The two primary aspects of growth are (1) earnings growth and (2) valuation growth. The G in SQGLP addresses earnings growth, whereas the P (Price) determines valuation growthI am much more interested in earnings growth… For any multibagger to form, rapid growth in EPS is essential !
4 – (L) Longevity (of growth):Companies should have a sound strategy to maintain competitive advantage over peers. Likewise, value-enhancing acquisitions will help extend longevity of growth. Longevity of growth is critical and is termed as MOAT. Wider the MOAT, more are the chances of company to deliver continuous QoQ and YoY growth.
5 – (P) Price :Arithmetically, multibaggers in stock price is achieved by the multiplicative combination of earnings growth and valuation growth (e.g. 10x earnings growth with 4x valuation growth will give you 40 bagger). The best way to improve the odds of valuation growth is by ensuring favourable purchase price. A simple rule of favourable purchase price is single-digit P/E. However, in certain situations, low P/E may not be the sole determinant of favorable valuation (e.g. During bottom-of-cycle, earnings of cyclical stocks are depressed leading to high P/Es.)
Along with above elements, high RONW and low (nil/reducing) debt are important factors to be looked into which increases possibility of being scrip as multibagger.
With the SQGLP formula, if I find multibagger, I buy and sit tight on it and give sufficient time for my investment pick to grow…. Patience and temperament are rare virtues and I try to improve upon it continually.Last but not least, Its easy to spot multibaggers but difficult to hold them for years…Once stock gets double or trible, one lose patience and sell that multibagger.. .It has happened with me also 🙂 Learning and improving daily