Here's a 10-point checklist to pick multi-bagger stocks from Mr. Achin Goel, head of Wealth Management and Financial Planning at Bonanza Portfolio Ltd.
By Achin Goel
Here’s a 10-point checklist to pick multi-bagger stocks from Mr. Achin Goel, head of Wealth Management and Financial Planning at Bonanza Portfolio Ltd.
- Scalable products or business: In generic sense, it should be a business having sufficient scope for sales growth and increasing market share. Market size and current business strategy of company should be such that there is ample size of opportunity for growth. Products & services that company provides should not be un-predictable over next few years with expansion plan properly laid out.
- Profitability: Company should have better margins than its peers or at least growing operating margins. If company has lower cost of production compared to other companies in the domain, it will have more earnings and cash for future. Similarly if it has pricing power which is ability to increase price for its products and that too priced higher compared to peers then company will have higher margins and more reserves and surplus with more retained earnings.
- Cheap valuations: Not necessary current PE or EV/EBITDA but compared to its projected future years’ earnings, it should be valued cheap and current price paid by investor should be an attractive buy for that projected earnings. Stock becomes bagger due to both EPS growth and PE expansion. Once market starts to pay higher PE multiples it is sign that general combined consensus has accepted the stock as valued quality stock at the same time being cautious on increasing PE without increment in earnings or fundamentals. High sales to market cap is also a good indicator in this.
- Companies eating market share of market leaders: Company capturing more and more market share from leaders is a great sign as smaller companies start small and eventually their products becoming visible and becoming customer’s choice over other products in market shows company may continue to have robust growth. So one should always keep looking out for such growth stories
- Turnarounds: Some multi-bagger stocks also show some potential signs before they turn around. One should look out for key information like Management change, entering a new product or service territory, change of business model , sector becoming favorable in economy, rating upgrade of debt papers of the company etc.. If in effect of above company’s sales and profit starts boosting on quarterly basis its a sign that it might be turning around from loss to profits or from very low margins to higher margins.
- Consistency in financial ratios: In smaller companies Return on equity / capital employed may not be that high initially but if its continuously improving year on year , its indicating that management is able to deploy the capital efficiently and is generating better profits over this capital. One should also keep an eye on other important financial rations like D/E, Net profitability, shareholding pattern etc. which can provide some very important information about the company
- Sound Future Expansion Plans: Any expansion in Capacity and development in production, results in increase in earnings of a company thereby resulting into higher share price. Well chalked out expansion plans, structural changes in business models and launch of new products can have material impact on the share price. If there is already high demand of its products and plants are operating at high utilization then adding new plant becomes evident necessity.
- Management Quality: Management is responsible for maximization of wealth of shareholders. If the management is visionary and ethical and has fire in belly attitude to scale up, there are high chances that they will take the business to another level. One should also keep an eye on corporate governance practices of the company to ensure investor doesn’t suffer a setback at later stage.
- Unique products or services: If there are less number of players providing what company provides then situation of monopoly or oligopoly can arise. This also helps company not only to sustain long but charge a premium for its deliverable. Capitalism works on moat building abilities of companies too.
- Sector boom: Company should belong to sector that is having good period in economy. This matters much more in commodity stocks. When a particular commodity is in upturn period, many stocks benefit from demand picking up from that sector. Also demographics of the country, where youth is spending high is captured well as target market by company it is likely to have great sales growth potential.