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How to Pick a Multibagger Stock In 2023

Introduction

You might have heard stories of people making lakhs of rupees from the share markets within a few years by investing just a few thousand. And you wonder if these stories are too good to be true.

What if we tell you that this is indeed possible? Now, how? The key is identifying a few multi-bagger stocks and investing in them with a short to medium investment horizon.

Consider this. The shares of Ruchi Soya Industries Limited were trading for Rs. 26.05 apiece at the National Stock Exchange (NSE) in May 2017. After five years, i.e., in May 2022, the value of these shares rose to Rs. 937.20 apiece, providing a whopping 3497.70% returns. It means had you invested Rs. 10,000 in Ruchi Soya Industries shares in 2017, the value of your investment would have grown to approximately Rs. 3.6 lakhs in 2022.

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Isn’t it amazing? But the question is, how would you know which stocks would become multi-baggers in the future? This article presents a few tips to help you identify potential multi-bagger stocks in their early stages. Keep reading.

What are multi-bagger stocks?

Multi-bagger stocks can provide more than 100% returns in the short to mid-term. These stocks belong to companies with high growth potential. Most multi-bagger stocks are undervalued at the time of their launch, but subsequently, they flourish when exposed to the secondary markets.

How do you spot multi-bagger stocks?

Multi-bagger stocks exhibit specific characteristics, unlike other stocks in the stock markets. For instance, these stocks are issued by companies with enormous growth potential, reliable production techniques, and highly efficient management teams and promoters. You need to look out for these factors to spot multi-bagger stocks.

Below are a few tips that can help you out:

  • Analyse the past performance of the company

A company’s past performance provides critical insights into its future potential. It helps you speculate how it can perform in the upcoming years and make your trading decisions accordingly. For a stock to provide multi-bagger returns, the issuing company needs to perform better than most of its counterparts in the industry.

While identifying multi-bagger stocks, try analysing the quarter-wise performance of the issuing company. Even if the revenues are low in the current quarter, the company has performed exceedingly well in its segment, so you can consider investing in its stocks.

  • Look at the D/E ratio

The D/E ratio of the company indicates how much a company owes as compared to its best assets. Although there are no standard criteria to measure a company’s D/E ratio as it changes from one industry to another, you can look for the ones with a less than 25% ratio. It indicates that the company’s debts are less than one-fourth of its net assets.

The lower a company’s D/E ratio is, the better its chances of providing multi-bagger returns in the long run.

  • Evaluate the management team’s strength

The management team is the backbone responsible for running a company. Without a solid and competent management team, no company can succeed.

Thus, before investing in a company’s shares, do not forget to check its management team's experience and track record. If a company boasts strong managers and promoters, its shares can become a multi-bagger in the future.

  • Check out the competitive positioning

A company’s competitive positioning is another crucial factor determining its growth potential. Companies with too many competitors may struggle to make high profits. On the other hand, those operating in the monopoly markets have better chances of generating lofty profits in the long run.

Thus, while trying to spot a multi-bagger stock in the market, check for the issuing company's competitive advantage over its rivals.

  • Analyse key ratios

Apart from the D/E ratio (mentioned above), several other financial ratios determine a company’s strength. These include the price-to-earnings (PE) ratio, the price-to-sales (PS) ratio, and the price-to-book PB ratio. A careful analysis of these ratios can give you an idea of the company’s growth potential.

It has been historically observed that companies maintaining high PE, PB, and PS ratios have often given multi-bagger returns to investors.

To conclude

With these tips, you can spot potential multi-bagger returns in the market and invest in them for sublime wealth creation. However, you must try to stay invested for the long term and not let temporary market fluctuations influence your investment decisions.

With Motilal Oswal, you can open a free Demat account and begin investing in the stock markets today.

 

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