How to pick a multi-bagger

Small-cap and mid-cap stocks have the greatest growth potential amongst all stocks.

May 21, 2017 03:05 IST India Infoline News Service

Analyzing Market Algorithms
Small-cap and mid-cap stocks have the greatest growth potential amongst all stocks. There are many reasons why small-cap and mid-cap stocks grow at a faster pace than large-cap stocks, one of the main reasons being a smaller capital base to service, which reflects in their higher earnings growth and higher returns on capital employed.

So, if you are looking for multi-bagger stocks that have the potential to become multi-baggers of tomorrow, you will find them only in the small-cap and mid-cap space. But how do you spot them and catch them young? Here are a few tips to help you find them:

Study the financials: The profit and loss statement and the balance sheets provides an overview of the financial health of the company. So, study them to find out the financial strengths and weaknesses of the company.

For example, if the company has no debt or very low debt, it makes sense to put in money in the company. Look at the cash flow of the company. If the company is growing on the internal cash flow, it surely has a great potential to grow.

Sustained growth: If a company has sustained growth in its sales, revenues and profits over the long period of time, one can safely assume that this company has the potential to sustain its growth going forward. The growth may not have been at a scorching pace, but it should be consistent and sustainable year-on-year over the long term.

Look at the company’s market share: Take a look at the company’s products and the market share its products enjoy. If the company is a market leader enjoying a dominant share of the market, it has a great future ahead even if the market for its products is small at the moment.

Cheap valuations: Since the company is not fancied by the investors at large, its stock will be available cheap as compared to its peers that are the darling of the investors. In other words, buying cheap is a great way to catch a multi-bagger early on.
No institutional ownership: The company should not be on the radar of the institutions, because the moment institutions discover it, the share price will soar, making the stock overvalued.

Good management: The management of the company should be qualified, competent, focused and trustworthy, having a strong sense of business acumen and high standards of integrity and corporate governance.

Once you have identified such a stock, you have to remain invested for the long term to give enough time for the company to grow into a multi-bagger. Remember, you cannot reap fruits in a month or two after sowing the seed. After all, investing is not trading, but staying invested over the long term.

Related Story