A 3-Step Guide to Identify Multibagger Stocks

The functioning of the stock market is regarded with much fascination. The rise and fall of stocks seem to be shrouded in an aura of mystery, often appearing to be guided by luck and other lofty forces quite beyond human powers of comprehension and control. So how do experts foretell the performance of the stocks? Do they just glance at the fundamentals of any particular stock and trust their gut or do they have some very powerful astrologers on speed-dial? The answer is simpler and more logical than that- thorough market research. Timing is a crucial aspect as well. Most success stories are basically just about the right people being at the right place at the right time. This article has been written in the hope to make it simpler for you to identify the right multibagger stocks at the right time so that you can optimize on their profits over time.

Multibagger stocks can be defined in simple terms to be stocks that have the potential to perform very well over a few years’ time, to produce big profits and thus give back returns that are multiple times greater than the price of the stock at present. Multibaggers are ideal investments for you if you want a low-risk venture that would yield liquidity in 1-2 years and if you wish to steer clear of market volatility.

Identifying Multibagger Stocks

You can always engage the services of a financial advisor to help you with the identification of these amazingly tempting multibaggers, but there is a certain feeling of satisfaction when you get to do this yourself. Experts at DynamicLevels check out for 3 primary factors when identifying multibaggers. These three steps will help you to gain better perspective.

• The P/E Ratio: The Price-Earnings ratio of any stock, in itself, is not very insightful. However, when the P/E of a company is compared with the Industry P/E, it gives us a clear idea of how much scope of growth a stock has. Simply put, the P/E of a stock should ideally be lower than the industry P/E. The share price of the stock should also be viewed in light of the P/E. If the share price of a stock is low, but it has already reached the industry P/E, the stock has barely any scope of attaining a higher share price as the saturation level has already been reached. The P/E ratio thus helps us know whether a stock is overvalued or undervalued.
• Profitability: The profitability of an instrument is an effective indicator of the performance of the stock. The EPS (earnings per share) and the PAT (profitability after taxes) should ideally be seen to be growing year-on-year. Increase in the Operation profits of a company denotes that there is growing demand for the products of the company and this demand energizes the growth of the company.
• Prospect: The prospect a company has, indicates its future potential. If the industry that a company belongs to has bright future prospects, the company is usually a good choice. Government policies are of importance here. For example, with the Modi government laying stress on the textile industry to generate more employability, companies like Vardhman Textiles and KPR Mills are likely to be beneficiaries. HSIL is another company that has benefited from the “Modi”fications in industry policies.

To sum up, the key is in the 3 P’s- P/E ratio, Profitability and Prospect. If these three factors are positive in a stock, it is highly likely to be a multibagger and it would be wise to buy such a stock for the long haul. However, one needs to follow the markets carefully and regularly to understand how a stock is actually placed in the markets.