Multibagger Stocks- Meaning, Identification and Risks of Multibagger Stocks in India

If you follow stock market news, then you must have come across news such as XYZ stock turning multibagger gaining 1000% in the last five years, multibagger ABC stock returning 500% to its investors, and so on. So what is multibagger stock? Have you ever wondered how a stock becomes a multibagger and how you can identify them and invest?

This article will help you understand everything about multibagger stock India so let’s begin.

What are Multibagger Stocks?

Stocks that offer over a hundred percent return in a short period can be referred to as multibagger stocks. Peter Lynch first introduced the term multibagger in the book; One Up On Wall Street. He referred to the stocks, that offered returns that were multiple times the investment cost or original buying price of the stocks.

For instance, if you had purchased stock A for Rs. 100 per piece in 2021, and in 2024, the stock price went up to Rs. 500 per piece, then the stock has returned a whopping 400% in just three years and thus can be considered as a multibagger stock.

However, the prime question here is how you can identify a multibagger stock early to generate better returns. As most of the multibagger stocks remain undervalued and that is the prime time to invest in them. However, it needs precision and utmost knowledge of the market, industry, and the economy to understand whether the stock can be a multibagger or not.

How to Identify Multibagger Stocks?

If you are trying to identify a multibagger stock in India then here are some of the factors you must evaluate.

Competitive edge:

A business grows multifold when it has a competitive edge over its peers. For instance, if today two companies let’s say Company X and Company Y started the same business, at the same time, however, Company X has access to a manufacturing facility for free, while Company Y, for acquiring the same facility has to pay a monthly rent of some crores, then the former company has a competitive edge due to the cost-benefit. Therefore, when identifying a multibagger stock, you need to see what competitive advantage the company/ business has that can help it grow multifold.

EPS Growth:

The next factor that a multibagger stock should have is a growing EPS or growing earnings. Since investors look for multifold returns from these stocks, the earnings that these stocks offer must be growing over the years. The reason behind this is that multibagger stocks are usually growth stocks, so the revenue of the business has to be going up and so are the profits and in turn the earnings that it generates for the investors.

Higher profit margins:

When a business enjoys a competitive advantage, it can charge better prices to its customers. This in turn can help the business generate higher profit margins compared to its peers. So, if you are looking for a multibagger stock, then you must check whether the profit margins generated by the company are higher than its competitors or not.

Prudent Management:

The management of a company plays a pivotal role in making the business stand out. So, when you are trying to find multibagger stock in India then you must evaluate how prudent and efficient the management of the company is. Whether they make prompt decisions or not, whether they are optimally utilizing their funds, and resources or not. If the management of the company is not prudent, even though the company and the business have a competitive edge, it can go in vain in the long run, leaving the investors in a value trap.

Significant promoter holdings:

While assessing multibagger stocks, make sure the companies you are shortlisting have a stronghold of the promoters. Since they are the initial investors, so if they do not remain committed to the business and leave, it signifies issues within the business, which can lead to a decrease in the share price.

Analyze Financial Ratios:

For evaluating multibagger stocks, you can consider companies with a debt-to-equity ratio up to 0.3. Apart from this, you can also analyze the P/E ratio to understand how the stock is valued.

Patience is the key: 

Though multibagger stocks are stocks that return exponential profits in the short term within that investment tenure, there can be multiple ups and downs. You need to stay calm and keep an eye on the fundamentals of the business, if that is strong, stay invested, and do not panic sell.

Risks Associated With Multibagger Shares

As multibagger stocks generate multifold returns, higher risks come with higher returns. So, if you are planning to invest in multibagger stocks, you need to be cautious about the risk associated with these stocks too.

The primary risk associated with these stocks is value traps. Investors tend to invest in these stocks when they are undervalued so that when the company grows exponentially, they can reap the profits. However, not all undervalued shares turn out to be multibagger stocks. If the fundamentals are not strong of the company, then the company stock instead of rising as per your expectation can go down south, leaving you in a value trap.

The economic downturns can also influence the stock price, as these stocks are highly sensitive to the markets as they are growing companies. So, while picking multibagger stocks, you need to consider all these factors, and also you must understand when to exit the market if the investment turns sour.

Why Should You Invest In Multibagger Stocks?

The reasons behind investing in multibagger stocks include –

Long-term investment:

Long-term gains as these stocks offer multifold returns over a period if you stay invested. However, the stock picking has to be right.

Higher returns:

The potential returns are higher if you can pick the right multibagger stock and the stock grows well.

Conclusion

Thus, multibagger stocks in India can be a real gem for investors provided the stocks are picked after thorough research and analysis. If you are looking for higher returns and you have a high-risk appetite, then these stocks can be right for your portfolio.

FAQs on MultiBagger Stock

How do you know if a stock is multibagger?

To evaluate a multibagger stock, you must check its debt-to-equity ratio, P/E ratio, whether the earnings are growing annually or not, whether it has strong management or not, and whether it has a competitive edge or not.

Are multibagger stocks risky?

Yes, multibagger stocks are risky investments as the stocks are of growing companies, which are highly volatile and subjected to market volatility economic volatility, and more.

What is the difference between penny stocks and multibagger stocks?

Penny stocks are cheap stocks, which are available at a very low price even below Rs. 10 or so. While multibagger stocks are those, which offer multifold returns usually over 100% in a short tenure.