Finding multibagger stock is an art which great investors know and new investor should learn. In this blog post I am going to explain how you can find multibagger stock that could double triple your money over the period of time. It's long term bet and your patience will be tested. Sometimes if you are lucky your stock will double in no time but if you are LUCKY.
To find multibagger stock you need to check health of company and how company will perform over the period of time. This you can do by it's balance sheet and to predict future by looking at their product or services. Also we can predict company's future by looking at company's past few years performance.
So now the question is "how to check health of the company?". Believe me it's simple and ANYBODY can do this. You won't require any degree for this it's that simple. We will understand this by taking example of any stock so that you will not get bored by terminologies and it will be easier for you to understand as well.
I am going to take example of "SuperHouse" scrip which is listed in NSE and BSE.
BSE Code: 523283
NSE Code: SUPERHOUSE
To see stock quote and different parameters value talked in the below section please refer
http://www.moneycontrol.com/india/stockpricequote/leather-products/superhouse/SL
There are different parameters of company health which we will check for this company and you can apply this same method to evaluate quality of any company.
#1 EPS (Earnings Per Share)
Earnings per share is how company is performing. What company is earning per share. If you look at the below formula then you will realize the importance of this parameter.
Formula:
(Net Profit - Dividend) / Number of Share
If you do little math then you will realize that higher the net profit better the EPS. So buy stock which has higher EPS. Our example scrip SUPERHOUSE has EPS of Rs.22.82 (source:moneycontrol.com)
#2 PE Ratio (Price/Earning)
Till now you have learnt EPS but how would you know whether the current stock price justifies the EPS or not. That we can find using PE Ratio. Using PE ratio we can find whether the stock is already at it's best price or it has potential to go up further. PE Ratio is also a simple formula like EPS.
Formula:
Stock Price / EPS
Isn't it simple? Low PE better script, high PE meaning it's already at it's fair value.
Our example scrip is trading at PE of 7.08. I would consider any scrip which is trading below 10 should have potential to touch PE of 10 or higher.
Basically the idea is go for low PE stocks.
#3 Industry PE
So far you understood 2 most important parameters which are heart of analyzing fundamental of any company. Now you also need to understand where this company is standing in overall sector. For example SUPERHOUSE falls into Leather Product sector so we need to see whether overall sector is performing well or not and if yes then is this company has potential to outperform.
SUPERHOUSE is trading at PE of 7.08 but overall industry PE is 28.5 so there are fair chances that this scrip will perform better and has potential to go up. High industry PE also denotes that this sector has potential to go up.
This is also a important factor because in many other sectors you will find lot of cheap stock(low PE) but you also need to understand that whether overall sector is performing well or not.
#4 Last 5 Years Earnings
This parameter will show how robust is the company's management and business model. You don't need to understand balance sheet of the company entirely just focus on net profit figure. Basically in this parameter we will identify those companies which are performing better over the period of time. I normally see 5 years earnings to see the growth potential company is having and will have in the future. In this parameter go for the company which has not made any losses in net profit and also profit increased year on year. This parameter is important because this will filter out lot of scrips from your list and only gems will remain.
#5 Book Value
Book value is accounting value of any company. For now just understand that book value is the value of each share considering asset and depreciation and as I said it's accounting value so ideally stock price should be above this price from company's perspective.
Applying all of the above filters if you find any stock trading below book value then it's good buy.
In case of SUPERHOUSE stock the book value is Rs.193 so this stock should have it's price around/above Rs. 193 ideally.
#6 Market Capital
In simple words Market capital is multiplication of total number of shares and stock price. That is the reason why market cap keeps changing on stock price movement. I give very low weightage on this parameter because I believe in company quality not market cap. Infosys was not trading at same market cap as today, when it was listed in the 1993.
#7 News About Company
Before you buy you need to look at company news. You can easily find such news on google. Just check if any bad news about company in recent time.
So, these are the 7 steps using which you can find multibagger stock in any market. Once you apply all of the above methods in stock finding your investment will become safe and money will grow over a period of time. Once again let me remind you that don't invest all of your money in single shot, instead invest partly. If you prefer SIP that would be great.
