Are you a stocks enthusiast? If yes, you definitely love creating portfolios, don’t you?! But is your portfolio-building process in the correct direction? This article will help you find this. Even if you are a newbie to the whole activity, this article will be useful to help you build a multi-bagger portfolio.
What is a multibagger portfolio?
Let’s start with the basics. What do we mean by a Portfolio?
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). A portfolio may also contain a wide range of assets including real estate, art, and private investments.
Now, comes the term “Multi-bagger”. This is definitely self-explanatory. It suggests something big and profitable. So, the term is defined as, “Stocks that give returns that are several times their costs are called multi-baggers. These are essentially stocks that are undervalued and have strong fundamentals, thus presenting themselves as great investment options. Multi-bagger stock companies are strong on corporate governance and have businesses that are scalable within a short span of time.” To explain the concept more simply: A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. Thus, multi-baggers are stocks whose prices have risen multiple times their initial investment values.
How can I build a multibagger portfolio?
Before proceeding, it is important to know that what can come under Multi-bagger Stocks? Companies with good fundamentals, sound management, strong governance, and those whose stock prices are undervalued tend to fall in this category of multi-bagger stocks.
After introducing the terms, now it’s time to dig into the topic: How to build a true Multi-bagger Portfolio.
- Check the Future of Company: It is very important to analyze the future of companies in order to build a multi-bagger portfolio. But how can someone predict the future of a company? You can do this by interpreting the company’s historical growth. The company should be a consistent performer in terms of revenue and net profit margin. Look for companies which have huge growing prospects in the next 5-10 years. Also, the industry of the company should definitely have multi-fold growing potential.
- Debts of Company: You should avoid investing in companies which have many debts. Borrowings of the company must certainly be taken under consideration before investing. Check for the debt to equity ratio of companies, which is also known as financial leverage of a company. You can do this by dividing the company’s liabilities by shareholder’s equity. The ideal debt to equity ratio should not go beyond 2.0. A ratio of 2.0 indicates that a company finances its capital from 67% debt and 33% equity.
- Competitiveness of the company: The company should have competitive advantage over others. This ensures the stability of the company. You need stable companies for your multi-bagger portfolio.
- Corporate Governance of the company: What do we mean by Corporate governance? It is the system by which companies are directed and controlled. A company’s board of directors is the primary force influencing corporate governance. So, why is it important to check the corporate governance of companies for your multi-bagger portfolio? It is necessary to ensure that the company you will be investing in has efficient management and they have integrity. You can check the corporate governance by looking at how does the company ensures independence of auditors and the board of directors, check the value of shares they offer and promise, and so on.
- Check for PE ratio of companies: PE ratio, also known as the price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). Before you invest in the company, ensure that it has a high PE ratio. A high PE ratio suggests that the investors are expecting higher earnings growth in the future compared to companies with a lower PE ratio. This aspect is very important for creating a multi-bagger portfolio. (Image 2)
- Earnings Growth: Ensure that the company has strong earnings growth. For this, you need to check the EPS ratio of the company. The earnings per share ratio (EPS) measures the amount of a company’s net income that is theoretically available for payment to the holders of its common stock. Companies with a high EPS ratio generates an excellent dividend for investors, which tells you that your investment is good.
- Portfolio and Assets Allocation: To construct a dynamic portfolio and reduce risks, it is very important to have a right size of asset allocation. Asset allocation, basically is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The portfolio should always be balanced with the size of asset allocation. Any asset allocation overweighed or oversized will have an adverse impact on the portfolio.
- Expansion of Company: Check if the company is expanding or is planning of expanding its business in future. You can check if the company wants to keep producing the same line of products or there are any plans of adding new products in the manufacturing business. If the company has expansion plans, then it is very good for your creation of Multi-bagger portfolio.
|Company||Held By||% Holding in June ’21||% Change (year-to-date)|
|Elecon Engineering||V. K. Kedia||1.19||298|
|Rama Phosphates||D. Khanna||1.77||256|
|Acrysil Ltd.||A. Kacholia||3.75||240|
|Deepak Spinners||D. Khanna||2.07||228|
|HLE Glascoat Ltd.||A. Kacholia||1.39||217|
|Nitin Spinners Ltd.||D. Khanna||1.24||206|
|Vishnu Chemicals Ltd.||A. Kacholia||4.93||181|
|Anant Raj Ltd.||R. Jhunjhunwala||3.39||135|
|Shaily Engineering Plastics||A. Kacholia||7.21||142|
|Man InfraConstruction Ltd.||R. Jhunjhunwala||1.21||106|
Good Luck with your portfolio!
To create a Multi-bagger portfolio, it is very important to be open-minded and aware. Many a times people fall for the face value of the company. You should never do that. Often, a company appears successful and is considered to be good for investment, but turns out to be a very bad option for a multi-bagger portfolio. You need to carry out a thorough research for your investments.
Another very important, or probably the most important aspect after investing in a potential multi-bagger stock is one’s patience. The idea of having a multi-bagger portfolio sound very exciting at first, but identifying the potential options and holding on to them during their good and bad times both, is a hard task.
So, with a very careful planning, research and patience, you will definitely be able to have a multi-bagger portfolio. Don’t fall for any traps and never let emotions guide you in this process.
All the Best!