Steps one should take when deciding to buy a stock
1. Market Capitalization matters
Most 100x multibaggers started as companies with market capitalization of less than 1000 Cr. Market capitalization is the total amount of money required to buy the entire company from its existing shareholders.
Titan was a <1000 Cr company when legendary investor Rakesh Jhunjhunwala invested in it. Similarly, a recent multibagger stock named Aditya Vision also started as a <100 Cr market cap company. Hence, finding and catching stocks early when the market cap low is important in finding multibaggers.
2. Profit Uptrend
The job of a company is to constantly increase the profits and hence the most important logic behind identifying multibaggers is finding stocks which have a strong Profit uptrend. Profit uptrend means that the company should have been continuously increasing profits in the past 2-3 years. A strong profit uptrend indicates a management’s ability to execute well and continuously increase profits. Such profit uptrends can be identified early by looking at the quarterly results of companies.
3. Good Valuation
A retail investor must enter a potential multibagger stock at a good valuation. Valuations are determined by a metric known as the PE ratio. A retail investor must purchase every stock at fair valuations. Fair valuation means that the PE of the stock should be at the lower end of the sectoral PE.
For example, the sectoral PE of clean energy stocks is between 30 – 70. A company with PE less than 50, which is the exact average of the clean energy range, would be considered to be fairly valued in the clean energy sector. Similarly, there are sectoral PE ratios for each sector and an investor must buy stocks which are reasonably priced considering the average PE ratio of the sector.
4. Information
Information helps an investor predict the future of a company. For example, if a company has received a very large order, there is a high probability that the company will increase its profits in the future as it executes the order and may post very strong profits. Hence, an investor should study large order data. All companies are mandated to disclose large orders to the exchanges and such order data can easily be discovered on Sovrenn Large Order Receipts, a platform which specializes in providing curated filtered information about microcaps and smallcaps.
Similarly, if a company raises funding for future growth through preferential allotment, such a company may post strong numbers in the future and increase its profits which will lead to a stock price increase. Such preferential allotment data is also publicly accessible and is disclosed to exchanges by the companies.
The third type of information, which is crucial, is the capacity expansion data . A company which is doubling its capacity may double its profits as well, if the company is able to sell the extra production in the market. Hence, many companies which operate in high growth sectors and undergo significant capacity expansion, may turn out to be potential multibagger stocks.
5. HNI Buying
Many HNI investors also keep hunting for such multibagger stocks and studying their buys can help retail investors spot such hidden gems. This data is also available through bulk deals and shareholding patterns. For example, a recent multibagger stock named Taylormade Renewables witnessed HNI buying by investor Rajesh Joseph. The stock also received many large orders and raised funding through preferential equity allotment.
6. Great Sector
Sector plays an important role in helping a company increase its profits. For example, clean energy is a very high growth sector and companies operating in this sector can become very large in the future. Similarly, companies operating in defence, electric vehicles, fintech platforms can become very big due to the high CAGR of the sector in which they operate. Hence, it is imperative that a retail investor studies companies which are operating in these sectors and identifies those companies which are led by great management. Companies operating in such high growth sectors can again be found at Sovrenn discovery.
A multibagger stock typically follows many of the characteristics mentioned above. A recent multibagger stock named Knowledge Marine Engineering Works became a multibagger after receiving a ~100 Cr order. Once the company received this large order, the company’s profits increased significantly and consequently the stock price of the company also increased significantly. Similarly, many other stocks became multibaggers after receiving large orders, getting preferential funding or after undergoing capacity expansion. Hence, retail investors must understand the 6 points mentioned in the article and try finding multibaggers using this framework.