Multibagger Penny Stocks

If you invest or trade in the stocks , you may have come across the term ‘penny stocks. Penny stocks are those that are traded at very low prices – below Rs. 10 in India and traded for less than $5 in the US markets. These stocks don't have much information around them. Penny stocks are hard to spot in the market and have a low capitalization.

Investors who want to earn large sums of profit will not opt for penny stocks. Generally, not many traders show interest in such stocks compared to the large market capitalization of established companies.

Investors use penny stocks to make small investments, as a result of their easy affordability. However, before picking a penny stock as an investor, it is necessary to research the company, its financial foundation, growth prospects, and industry standards. Penny stocks may eventually turn into multi-bagger penny stocks.

What are Multibagger Penny Stocks?

Multibagger penny stocks are similar to penny stocks. However, the only difference is that their price frequently increases, from the time of the investment. Every ‘bag’ represents the first investment that was made. Suppose, as an investor, you invest Rs. 5 in a particular stock, and over time, this price rises to Rs. 10; this is called a two-bagger (or ‘two bags’). Similarly, if the price increases to Rs. 15, then it is called a three-bagger, so on and so forth. When the price reaches Rs. 10, it is indicative of a 100% gain, when it reaches Rs. 15, it is indicative of a 200% gain, and so on.

These are called multi-bagger penny stocks. The term is derived from a baseball reference, where players accumulate bags as they run around the bases. This term has been drawn from the book, ‘One Up on Wall Street by Peter Lynch.

Reasons to invest in Multibagger Penny Stocks

Penny stocks are hard to find. Therefore, those which later turn into multi-bagger penny stocks are even more difficult to come by. Most investors don't think much of penny stocks. However, if the price shows an increase, it is understood that the company is in good financial health and has the potential to make progress, in the long run. Not all companies can start with a large market capitalization; a few may never. These stocks that are usually found between mid-cap and small-cap stocks are also called small-cap multi-bagger stocks.

Penny stocks are often misinterpreted as low-return stocks since they start low, and investors in the market tend to be impatient. If a company exhibits the right mix of great leadership, efficient management, financial stability, prudence, and decision-making capabilities, it's rather easy to transition to a multi-bagger penny stock and fetch high returns at low investments. This takes time in action, and investors or traders should hold the position for long periods.

Multibagger penny stocks are generally undervalued. If a company has solid management, hefty promoters, and growth potential it will eventually turn into multi-bagger profits.

Features of Multibagger Penny Stock Companies

  • Penny stocks that increase in value and become multi-bagger penny stocks, are those companies that have strong fundamentals and grow as a result of solid performance.
  • Multibagger penny stock generally belongs to a company that knows the direction it wishes to take, has clear goals and objectives, and has strong leadership.
  • If you are exploring Indian multi-bagger penny stock ideas, scout for a company that is at the early stages but is backed by a strong service or product that can carve a niche in the market.
  • Before investing in a penny stock, it is imminent to evaluate – why is it a penny stock in the first place? If the stock is undervalued, given that the company is in able hands and promises growth, it is a penny stock that may have the potential of turning into a multi-bagger. Calculating and reading the P/E ratio (price-to-earnings) ratio helps analyze if a penny stock is undervalued or overvalued. The P/E ratio is arrived at by dividing the stock price by the earnings per share (EPS). A low P/E ratio is indicative of the stock being undervalued.
  • Another way to look for multi-bagger penny stock in India is to assess a penny stock’s profit margins. The stock that has a greater profit margin, both gross and net, than the average for the industry, would possibly become a multi-bagger stock.
  • Multibagger penny stocks originate from companies that are backed by well-grounded promoters. A promoter holding that is solid is indicative of trust in the business.
  • A multi-bagger penny stock has a relatively high earnings per share (EPS) growth. Monitoring a company’s EPS and checking the percentage of growth helps assess whether the stock price can increase multiple times in the future.
  • If an investor plans to invest in penny stocks, it is important to check the debt-equity ratio of the company and the existence of liabilities. The debt-equity ratio signifies that if there are more liabilities, the company has sufficient assets that can be set off against such liabilities. It is calculated by dividing the total liabilities by the equity held by shareholders. If the ratio is below 0.5, the company is assumed to be doing well with lower debt. If the ratio is above 0.5, certain debt issues may interrupt the cash flow.
  • The industry or sector to which a penny stock belongs is also relevant when exploring multi-bagger penny stock ideas. Some industries or sectors may be positioned for greater growth than others. Keeping track of such industries helps in identifying a potential multi-bagger penny stock. If a particular industry or sector doesn’t show any growth potential, it may be difficult for a company with a low market cap and penny stocks to become a high-performing one.

Final Words

While penny stocks are usually undervalued and misinterpreted, the right penny stock can brag high returns at much lower investments. The same applies to a multi-bagger penny stock. Accurate research of the company is the only way of making profits in the long run.

Frequently Asked Questions Expand All

If an investor or trader can find the right penny stock backed by solid fundamentals, and buy such stock at extremely low prices, then he/she can make significant profits.

Penny stocks are a suitable buy for investors who have a high-risk appetite and are expecting high returns in the long run. If you have a low-risk appetite, it is advisable not to invest in these stocks.