Multibagger stocks are in news for long as they attract the interest of investors due to the staggering returns – ranging from 100 per cent to up to 1000 per cent in a given period.

What are Multibagger stocks?

A stock that offers exponential returns on its original investment is called a multibagger stock. The term multibagger was coined by legendary fund manager Peter Lynch in his best-selling book ‘One Up on Wall Street’. The returns offered by such stocks should be at least 100 per cent and can go up to more than 1000 per cent within a specific period of time.

For example, the share price of Asian Paints has grown by 9.6 times (860 per cent) between March 2012 and April 2022. Which means Rs 10 lakh invested in Asian Paints on March 30, 2012, would have transformed into Rs 96 lakh by April 1, 2022. The average Return on Capital Employed (ROCE) offered by Asian Paints over a ten-year period has been more than 35 per cent. The average Return on Equity (ROE) offered by this company over the same period has been 27 per cent.

How to analyse or find which stocks will be multi-baggers?

One must look for multiple qualitative and quantitative factors to discover companies that could become multibaggers. Some of them are – considerable promoter holding, high management integrity, efficient capital allocation, high margin business, ROCE>18 per cent, ROE>15 per cent, low debt or debt free, a consistent increase in net profit and cash flow, encouraging tailwinds, valuation etc.

However, rather than looking at individual stocks, a better approach would be to focus on constructing a potential multibagger stock portfolio having a mix of 20-25 stocks to avoid the consequences of under- and over-diversification.

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