How to identify multibagger shares?
How to identify multibagger stocks: Every person investing in the stock market is looking for a golden opportunity which can increase his capital manifold. Which is called ‘Multibagger’ in market language. But identifying that one right stock in the crowd of thousands of companies is like finding a needle in a haystack.
Ramdev Agarwal, one of India’s most successful investors and chairman of Motilal Oswal Financial Services, has an expertise in finding such ‘diamonds’. After all, how does he stand out from the crowd and identify those stocks which will give huge returns in future? He himself has disclosed this while sharing his investment strategy.
Away from the crowd, look where it is still dark
The most important part of Ramdev Aggarwal’s investment strategy is ‘looking for untouched companies’. He likes to bet on those companies which have not yet come into discussion or limelight, but their business is very strong from within. To explain this viewpoint, he gave the example of ‘Balkrishna Industries’.
Aggarwal says that when he bought the shares of this company, its market value was only Rs 100 crore. The company’s fundamentals were excellent, the P/E ratio was only 1 and the return on equity (ROE) was between 30 to 40 percent. Despite this, no one was asking for it in the market. Aggarwal met the company’s management, listened to their story and believed in the business model. This belief proved correct and within just two years the share price jumped from Rs 100 to Rs 1,200.
Along with growth, ‘right price’ is also important
Often new investors buy a stock just because it is running fast. Ramdev Aggarwal considers this a big mistake. According to him, as important as the growth of the company is, what is more important is the valuation at which you are buying it. For this he considers PEG ratio (Price/Earnings to Growth) as his biggest weapon.
To understand in simple words, if the PEG ratio of a good company is 1 or less, it means that the share is being sold at a cheap or fair price as per its growth pace. If this ratio is high, then the share is expensive.
Don’t fall into FOMO
Discipline is everything in the world of investing, even if sometimes it means giving up opportunities. Ramdev Aggarwal shared his anecdote related to Asian Paints, which is an advice for every investor. He wanted to buy shares of Asian Paints, but at his fixed price.
When the stock was at Rs 20, they were waiting for Rs 15. When he decided to pay Rs 20, the price became Rs 25. When he finally agreed to buy at Rs 23, he stopped on the advice of a friend that the price would fall. But the price did not fall, rather it climbed up to Rs 90. Agarwal could not earn a single penny in that historic rally. Despite this he has no regrets. He believes that it is better to let the opportunity go than to buy shares at a wrong price due to ‘FOMO’ (fear of missing out). Discipline is the secret to playing long innings in the market.
Don’t just look at profit figures, keep an eye on ‘cash’ too
Seeing profit on paper and actual money coming into the bank account are two different things. While evaluating any company, Ramdev Aggarwal gives a lot of emphasis on its ROE (Return on Equity) and likes companies with at least 25% ROE. But, he does not stop here.
They also check how quickly the company is able to recover its money from the market. If the ROE of a company is excellent, but it is taking 100 to 120 days to get payment after selling the goods, then it is an alarm bell. Aggarwal says that ‘cash flow is king’. If the company’s money is stuck in the market, the balance sheet figures can be misleading. Therefore, investors should look closely at not only the profits but also the company’s ability to generate cash.
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