All About Multibagger Stocks: Meaning, Identification, Examples and More

What’s the one common goal that all investors have? To generate significant returns on investment, of course. Multibagger stocks help achieve this goal. Whether you are a beginner to the stock market or a seasoned investor, it can always help you to get familiar with the finer details of the market and equity stocks. Getting to know the meaning of multi-bagger stocks is one such step in the right direction.

Check out the key details of these stocks, like their benefits and how you can identify multibagger stocks.

What are multibagger stocks? 
The term 'multibagger stock’ was first used by American investor Peter Lynch in his book ‘One Up on Wal Street.’ The meaning of multibagger stocks is simple. These are stocks that generate returns that are several times their initial investment. The key characteristics of these stocks and the companies they belong to are listed below:

• High growth potential
• Undervalued 
• Low debt
• High-profit margins
• Competitive industry advantage

The benefits of investing in multibagger stocks
Investing in multibagger stocks can offer several potential benefits. Here are a few key advantages of including multibagger stocks in your portfolio.

• High returns on investment 
  Multibagger stocks have the potential to generate exceptionally high returns over an extended period. These stocks typically experience significant appreciation in their market value, sometimes multiplying their initial investment value several times over.
• Wealth creation
  Investing in multibagger stocks can also be a powerful tool for wealth creation. If you identify and invest in the right multibagger stocks early on, the returns can be substantial and contribute significantly to building your investment portfolio.
• Long-term growth
  Multibagger stocks typically belong to companies with strong fundamentals and long-term growth prospects. Investing in such companies allows you to be part of their growth journey, benefiting from the expansion of their business, increased market share and rising profits over time.
• Portfolio diversification
  Adding multibagger stocks to your investment portfolio can help diversify your holdings. This is because such stocks typically belong to different sectors or industries, thus reducing the concentration of risk and providing exposure to a variety of businesses.
• Passive income
  Some multibagger stocks may also pay dividends to their shareholders. If you invest in the stocks of companies that have a history of consistent dividend payments, it can generate a regular stream of passive income for you.

How to identify multibagger stocks?
To experience the benefits of investing in multibagger stocks, you need to first be able to identify these stocks correctly. Only then can you create an investment plan revolving around stocks in this category. Fortunately, some key indicators can help you identify multibaggers that have the potential to generate exponential returns. Check out what these key identifiers are.

• Debt-to-equity ratio
  The debt-to-equity ratio is simply the total debt of a company divided by its total equity. Since companies whose shares are multibaggers typically have extremely low levels of debt, you need to look out for stocks that have a low debt-to-equity ratio. Experts recommend shortlisting shares whose debt-to-equity ratio does not exceed 0.3. You can use this as a benchmark for your stock selection.
• Price-to-earnings ratio
  The price-to-earnings ratio (PE ratio) is the ratio of a company’s share price to its earnings per share (EPS). While there is no benchmark PE ratio to watch out for, you need to pick stocks whose PE ratio is growing faster than the price of the shares. This indicates that such stocks have a high growth potential, thereby increasing the possibility of becoming multibaggers.
• Stock valuation
  Overvalued stocks may eventually suffer from price crashes when the market corrects itself. Multibagger stocks, on the other hand, are generally undervalued. This means that market correction can be beneficial, leading to a significant increase in the prices of these shares. As a result of such price rises, investors may enjoy exponential returns.
• Business or profit margins
  Companies whose shares are multibaggers generally have high profitability. So, to identify stocks that belong to this category, you also need to analyse the profit margins over the past few years. Companies that have consistently maintained higher profit margins may be better poised to grow into multibaggers over time.
• Revenue multiples
  The revenue multiple of a company is a measure of its equity relative to its revenue. Companies with the potential to become multibaggers may have low revenue multiples, but may report strong performance quarter after quarter. If you are interested in adding multibaggers to your portfolio, it may help to keep an eye on such stocks.
• Sources of revenue
  Lastly, to identify stocks that may become multibaggers, you’ll have to look at the sources of the company’s earnings. Ideally, the primary revenue should be scalable and easy to grow on a macro level.

The risks of investing in multibagger stocks
Despite the many benefits of multibaggers, there are some risks that you should keep an eye out for as an investor.

Firstly, you need to select your multibaggers diligently. Diversification is crucial when you are investing in multibagger stocks.  Investing heavily in a single multibagger stock can expose your portfolio to concentrated risk. If the stock fails to perform as expected, the impact on the overall portfolio can be significant. Diversification across different asset classes, sectors, and geographies can help reduce the risk associated with individual stock investments.

Additionally, multibagger stocks may also exhibit high levels of price volatility. Their prices can experience sharp and sudden movements, which can result in significant gains or losses. The price volatility may be driven by various factors, including market sentiment, company-specific news, or broader economic conditions.

Conclusion
Before you invest in multibagger stocks, you need to keep the risks and rewards in mind. This will help you create a well-rounded investment strategy that maximises rewards and minimises risks. Additionally, while it may be tempting to invest heavily in such stocks, you need to diversify your portfolio across different types of stocks as well as different asset classes. This will also help bring down the overall risk in your investment portfolio significantly.