The word “Multibagger” was introduced by legendary investor Peter Lynch to describe the situation whereby the investor has multiplied his capital multiple times by investing in a stock. Multibaggers are an investor’s biggest dreams. There is a saying that the average return an investor can expect from the stock market is between 10% to 15% per year and those aren’t that hard to find. But investors hunting down the multibaggers are not interested in those numbers. They are interested in the bigger picture; to generate 100% or even 200% or more from the stock market within a short period of time.
Is it possible? It definitely is. Here is an example of a stock that has just did that: Pro Medicus Limited listed on the Australia stock exchange. This company has generated over 200% in 1 year alone!
However, in order to find these companies, it is extremely difficult and requires a certain skill to especially profit from them. Here are 4 characteristics of companies with potential to become multibaggers:
1. They have small market capitalization
Think about the life cycle of a human being. When did they grow the fastest? It is when they are a child! Before companies like Apple become a multi-billion dollar company, they were once small companies as well. It is way easier for a small company to grow into a big company compared to a big company growing into a bigger company.
For example, if you started out with only RM 100 in your pocket and I asked you to generate 100% in returns with that money by the end of the week, it will be an easy task. Imagine another example whereby you have RM 100,000 in your pocket and I ask you to double that money by the end of the week. It is now an even harder task. The same applies to the stock market. The smaller the market capitalization, the easier it is for the company’s value to go up.
2. They Compete Through Customer Satisfaction
Multi-baggers are normally considered as underdogs which is why they are very hard to spot. They are small companies quietly serving their loyal customers in an industry dominated by large and powerful giants with deep pockets. However, despite being underdogs, these companies focus on providing their customers with excellent products and services to earn their trust and loyalty. That is how they steal market share silently below the radar of their large competitors. By the time the big boys found out, it is too late.
Take companies like Skechers for example. Their industry is dominated by gigantic companies with deep pockets such as Adidas and Nike. However, Skechers focused purely on providing one of the most comfortable footwear in the market by developing their shoes with memory foams. People started buying their shoes due to the extreme comfort and this allowed them steal market share and now become a strong competitor to Nike and Adidas.
3. They have a huge market to serve
Stock prices are driven mainly by profits generated by the company. The more profit the company generates over time, the faster their share prices will climb. This is why you see investors very sensitive during a period where the company will announce their quarterly results. In order for a company to see their stock price climbing rapidly, they will need to rapidly grow their revenues and profits. And the easiest way for them to do that is by quickly serving a huge market with tons of potential customers. It is better if that particular market is rapidly growing as well.
Consider companies like Facebook and Google. In the past, all companies advertise and promote their products are services through traditional media such as television, radio and newspaper. When Facebook and Google stepped into the picture, they have an entire universe of large and small corporations with tons of advertising dollars to conquer. This is why together with the excellent product they provide, they are able to quickly serve more customers and grow quickly in the process.
4. They are scalable
Scalability refers to the company’s ability to replicate their product and services to serve more customers. In order to grow rapidly, a company needs to be highly scalable. In other words, it must be easier to serve more customers should the need arise. There is no point to have a wonderful product or service and a huge market to serve if you are unable to serve your customers. Certain companies have difficulty scaling due to high labour intensity eating into their costs, issues with securing government approval and licenses, or issues with their new customers having different cultures and habits.
If possible, look also for businesses which can scale rapidly without increasing their costs considerably. That way, not only will the business be less risky, it will also be able to grow their profits rapidly over time resulting in their stock prices to skyrocket.
In summary, these are 4 key characteristics you need to look out for if you choose to hunt for multi-baggers in the stock market and make uncommon returns. However, you need to be more than disciplined in terms of digging out info regarding the company. You need to be obsessed with the company and be extremely involved in the analysis. This form of research tends to be extremely difficult which turns most common investors away. However, those who are willing to put themselves through the hardship to discover such stocks will be handsomely rewarded.
*All financial data from WealthPark, an investing tool for stocks to help you build your wealth by investing smarter, faster, and easier.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.
This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.