crisiscyclicalemerging leadersmarket capitalisationmulti baggerturnaround

Spotting potential multibagger candidates….Training your mind

What are the characteristics of a multi bagger? Is it possible to spot these well in time to take advantage of their huge growth potential? 

1.The shares of the company must be under pr
iced with a very low P/E multiple. This implies that the general market perception of the share’s present worth and future prospects must be negative and pessimistic. This is an essential requirement, because unless the market perception undergoes a reversal from the
negative to the positive, the share price will not register multi-fold jumps in value. In other words, the potential big winner must be an undiscovered and out-of-favour share that should have the capacity to catch the market’s fancy and move into the spotlight of publicity. Unless this happens, the price of a share cannot possibly double or triple in value.

2.The company must be poised to register a quantum jump in sales and profits in the current year. This requirement is as essential as a low P/E multiple. Unless there is a huge jump in the earnings per share (EPS) of a company, it will not be able to capture the attention of the investing public and acquire high visibility. If this does not happen, then its P/E multiple will not register a sharp rise, and its share price will not double or triple in value. For a company to become a big winner on the stock market, both its EPS and its P/E multiple must go up steeply.

3.The company must have a small market capitalisation, preferably below Rs. 2000-crores. A small capitalisation company does not require the induction of huge funds to make its share price jump on the bourses. Also, the shares of small capitalisation companies tend to be faster movers compared to large-capitalisation companies.

4.The following categories of companies provide the most fertile hunting ground for multi-baggers:

  • Emerging leaders in emerging industries,

  • Turnaround companies, and

  • Companies operating in high-growth and cyclical industries.

5.Multi baggers can also be picked up from industries that happen to be going through a crisis.

6.While searching for multi baggers, choosing the right industry can be as important as choosing the right company. When a depressed industry turns around, then almost every company operating in that industry becomes a multi-bagger. Top-down analysis, that is, working downwards from a broad macro-view of the industry to the micro-details of the individual company’s prospects is one of the surest ways of picking a future multi-bagger.

Spotting multi-baggers is not a fruitless or impossible task. They do exist and can be found, provided adequate investigation, time and patience is devoted to their search. All that it means is that the area of search has to be narrowed down to the identification of under-valued and unrecognised situations. If you can train your mind to think along these lines then you should have no difficulty in finding the pot of gold.

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