Multibagger Stocks or Stocks 10X – Tips to Create Wealth And to Avoid Risks

One keen market analyst who is into stock trading seems to have said that “Traditional ‘Value” investing is dead!

What then is the need of the hour for traders and investors to find multi-bagger stocks? Something that obviously gives negligible importance to the Value of a stock. So, they try to find the X-Factor in stock trading that does not merely ask for a doubling or trebling of the stock value in say 2 or 3 years. Instead, they look for a stock that can be phenomenal winners, i.e. price appreciation of 100% or more, called the multibagger stocks. Not just one of its kind. A host of them to build the cornerstone of their portfolio.

What Are Multibagger Stocks

• Multibagger stock is a name coined by Peter Lynch, in his bestseller ‘One up on Wall Street where he refers to small-cap stocks which are able to multiply in terms of ‘no of bags, each bag representing stock appreciation that is doubling in the original value. Thus a 10-bagger would refer to a stock that appreciates ten times its value.

• Historically in stock trading, Value stocks refer to those that are viewed as ‘Undervalued’ or trading below their intrinsic value, but with strong fundamentals. Now the term called ‘Multibagger Stocks’ brings up the concept of ‘Growth investing’ against ‘Value investing’ as a priority. With the huge increase in traded volumes in stock trading, pure value investing opportunities are few and far between and not available for long. Cheaper stock that remains underpriced long may lead to a ‘Value trap’ which is not investment worthy.

• Conversely, Multibagger stocks would be companies that are on a fast-track stock trading growth trajectory, even if the valuation shows a degree of overpricing in the short run, vis-à-vis its intrinsic value. Though this may not be the original concept when the term was first used, the attractiveness of multibaggers depends on the holding period of the stock, before it is able to appreciate to this extent. The shorter the holding period, the larger the ‘bagger’ and the smarter the investor.

Tips To Identify Multibagger Stocks

“No Research without action and No Action without Research” is a dictum that pays rich dividends in case of investments in stocks while online stock trading, Especially so for multi-bagger stock trading. Research of even the most simplistic nature could reveal the growth potential of stock and its future growth prospects in the following parameters:

• The earnings potential is demonstrated through a consistent track record of high Earnings per Share (EPS) which is also available at a reasonable price ie. and a low PE ratio (Price to Earnings)

• Screening stocks using the Graham Multiplier formula, to find stocks <22.5 which is arrived by:

PE X PBR

(where PE = Price to Earnings Ratio & PBR = Price to Book Value Ratio)

• Cash flow comfort in the short run and Leverage enjoyed through a low Debt/Equity ratio (not > 2.5)

• Efficient management of the business by a strong and reliable team

Risk Involved In Multibagger Stocks

If multi-bagger stocks in India are identified as potentially fast-moving ones in shorter time-frames, then they could be susceptible to untoward reversals and collapses as well, being highly sensitive to market ripples. Their risk-reward ratio is high making them not dependable till they deliver profits

• Overvalued stocks with indicatives like high PE(Profit to Earnings), Low liquidity, earnings constraint, etc.

• Belief systems based on market recommendations available on stock trading apps that Multibagger stocks will turn a person into a millionaire overnight when investment is not analysis backed

• The false notion that cheaper picks in the market (multibagger penny stocks) have greater growth potential than value stocks

• The conviction that even if the market is bearish, multibagger stocks will defy the general trend

Given the fact that the holding period before reap could be uncertainly long, it is unwise to stop monitoring the financial health of the investments. All multibagger stocks may not be fruitful in the timeframe planned and sometimes exit timing could be unanticipated

While not exiting such stocks in case of adverse signals would be a mistake, so too would be, an impatient attitude as many multibagger stocks in India take time to yield their true potential. Some take negative turns before bouncing back and need the investor to understand the market factors, stay focussed, and buy multibagger stocks for the next 10 years.

Tips To Avoid Risks

• Timing of entry for trading in a stock is very crucial. Traders must avoid getting caught in a bull trap in times when stocks ‘apparently’ break a resistance level, but after multiple attempts find themselves in a bear market. The build-up of momentum must be strong enough to avoid it.

• Reasonable price levels and valuations must always be aimed for while buying multibagger stocks in 2022. Else, the profits get muted and the investor is unable to harness the growth potential, even after finding the right stock.

• The Source of tips and recommendations received must be checked and found to be authentic, in order to avoid investment losses. Even the best stock trading platform cannot make up for unreliable information.

• Research time and trade timing errors could be avoided by trading in Exchange Traded Funds (ETFs) which proxy the stock or sector being identified, where liquidity issues are faced in a market.

• Most of this wisdom would be applied equally well to stock and commodity markets trading.