EXPLAINED: Why investors love multibaggers; how to spot these high-return stocks

In 1988, famed investor Peter Lynch in his book One Up on Wall Street coined the term multibagger. The term is inspired by the game of baseball where the bags (or bases) a runner touches are measures of a player’s success. Thus, a stock that gives manifold returns on investment, is a multibagger.

What are the characteristics of a multibagger stock?

Multibagger stocks are mostly undervalued stocks with strong fundamentals – this combination makes them good picks for investments. Essentially, multibagger companies have strong corporate governance and the ability to scale quickly. Effective management leads to the flow of profitability by checking expenses and thus increasing value for investors.

How stocks are categorised as per returns?

A stock whose value increases two-fold is called a two-bagger. When the price increases 10 times, it is called a 10-bagger. Multibaggers are thus typically stocks that have multiplied their value several times. So, if you are investing Rs 100, you can make Rs 1,000 of your investment – but you have to stay invested for a bit of time.

What are the steps to spot a multibagger?

Due diligence in the process of selecting a multibagger involves checking the debt level of a company. A debt of a company ideally should not exceed 30 per cent of its equity value. Also, one must check how the company has performed in the latest quarter and what its revenue potential could be. Finally check the company’s expansion plans and whether it has a scalable model.

What are the risks of investing in multibaggers?

To be able to make wealth, investors have to buy a substantial amount of multi-bagger stocks and stay invested for a certain amount of time. Investors may pick stocks in a company from an industry that has high value because of market conditions, but the value falls rapidly leading to a trap for the investors who keep waiting for the price to increase in the future, but the situation does not change.

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