Buying stocks which turn into Multibagger stocks is fantasy and dream of every investor in stock markets. And there is no magic wand available to tell you which stocks to buy that have potential to become multibagger. But here are few principles you may follow for analyzing stocks before investing in stock and then wait patiently for the best returns.
Management
Most important factors of any company are it's promoters and management. If the promoters and managers running the company are not trustworthy and capable of running the show, all is vein. Check credibility and qualifications of promoters and management. After all, you will not want to invest in the company whose promoters are, in prima facie, criminals and frauds. Also, if possible, check on if company follows corporate governance norms.
Economy and Sector
Check what sector company operates in and if you can understand the business at high level. If you don't know and understand what company exactly do to earn the revenues, it is a meaningless investment. Look for overall prospects of sector to make educated guess. The company needs to have robust, strong and scalable business model.
Intrinsic value of the stock
Check for intrinsic value of the stock. Check if stock is undervalued and has potential of value unlocking. Company may have good amount of cash reserves, land assets, real estate assets, investments in other companies/subsidiaries/mutual funds or fixed deposits.
EPS, Equity base and shareholding
Bigger the company's equity base, EPS is shared among that equity base. Opposite to this, smaller the equity base, EPS is shared among less no. of shares so EPS is higher for companies with lower equity base provided company has growing net profit numbers. More the promoters shareholding, lower would be the freely floating shares in market, so in favorable conditions, demand for shares would be on higher side and supply would be lower. Result? Higher stock prices! Strong positive cash flow is another factor to look for.
Last but not least, the stocks which are not much into discussion and stocks which do not reflect it's earnings growth in it's stock price growth are positives for a multi bagger stock.
A note before buying stocks for potential multibagger returns, your investment time horizon should be longer term (more than 4-5 years).
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