The Key Points Behind Multibagger Stocks: What Makes a Company Stand out and Give Brilliant Returns

The term ‘multi-bagger’ was coined by Peter Lynch, renowned fund manager of Fidelity’s Magellan Fund, one of the biggest investment firms during and even after Lynch’s retirement. During 1977-1990, Lynch’s market returns averaged at 29.2% per annum. People that have made more than 100% return by investing in the insurance businesses in Nepal would probably laugh at the 29.2% round-figure. But when you are managing a fund worth $18 Million, 29.2% is a very potent return year after year.

In his career, his assets under management increased from $18 Million to $14 Billion. Lynch specially focused on business cycles as opposed to the economic cycles while investing. It is true that if you are able to understand the business at a very high level, you’ll be very wealthy in the stock market.

Now that we have understood the significance of 29.2% in the big funds, let us look into the fundamentals of a few ‘hot stocks’ from 2012-2016 on NEPSE. There were many hot stocks from 2012-2016. However, I’ll be focusing on a few stocks from the major sectors.

The stocks I’ll be looking into are:

1. Everest Bank Limited (EBL) from the Banking sector, and
2. Nepal Life Insurance Company (NLIC) from the Life Insurance sector,

These stocks were not lottery tickets to get rich quick or “hot-stocks” as we like to call. We shouldn’t forget the fact that behind every stock, there is an underlying company. When you hear about someone who has made a fortune from the stock market, we should immediately understand that s/he picked multi-bagger stocks which gave returns in multiples over the course of four years of the bullish run from 2012-2016.

1. Everest Bank Limited (EBL):

EBL has been able to give a return of approximately 1800% from March of 2012 to November of 2016 and has been able to secure the title of 18 bagger stock. If you had invested Rs. 15 Lakh in the EBL scrip in March of 2012, the amount would have grown into Rs. 2 Crore 75 Lakh approximately before taxes by November of 2016. All you had to do was stay invested in the company for four years without selling a single share.     

The last trading price on the 21st of November 2016 for EBL stock was Rs. 3523. Your total investment return at 7830 units of EBL shares would be worth Rs. 2 Crore 75 Lakh approximately.

2. Nepal Life Insurance Company (NLIC):

NLIC has been able to give a return of approximately 4200% from March of 2012 to November of 2016 and has been able to secure the title of 42 bagger stock. If you had invested Rs. 15 Lakh in the NLIC scrip in March of 2012, the amount would have grown into Rs. 6 Crore 30 Lakh approximately by 30th of June of 2016 before taxes. All you had to do was stay invested in the company for four years without selling a single share.

The percentile figure included within small braces “()” is recorded to be negative growth.

The last trading price on the 30th of June 2016 for NLIC stock was Rs. 4595. Your total investment return at 13761 units of NLIC shares would be worth Rs. 6 Crore 30 Lakh approximately.

There were other multi-baggers as well during the 2012-2016 period. CHCL was a 10 bagger stock, PIC was a 32 bagger stock, SIC was a 30 bagger stock, UNL was a 10 bagger stock, and CIT was a 50 bagger stock. We have not included every stock that had outperformed the market from 2012-2016. However, the similarities in every underlying company representing these stocks are:

1. The dividends are not necessarily the deciding factors of the stock’s performance even though they add a lot to the table. PIC’s dividend history is not as strong as NLIC’s or CIT’s but it turned into a 32 bagger stock. EBL has a better dividend history than PIC but PIC has outperformed EBL in the market. We all know, the market price is always right.
2. Investors should be focusing on core business growth as opposed to running after the right shares and bonus shares. Speculation can turn out to be deadly when the stocks become more liquid. One should never invest only for bonus shares and the right shares. If the underlying company has no value, you’ll only be collecting the shares with no value.
3. Core business growth (deposits, loans, and advances in the banking sector, net premium in the insurance sector, sales of electricity in the hydropower sector, sales of products in the manufacturing sector) should be the major priority of the investors.
4. Even though we like to talk about the efficient market hypothesis, the investors are emotional beings and they are always future bound. Despite the fear that COVID-19 will be followed by a major stock market crash in Nepal, it didn’t happen. In most cases, the stock price can predict the performance of the company in the long run. For instance, even though NLIC was reporting a negative net profit in 2014 and 2015, it’s core business was growing. Therefore, the future value of the stock was highlighted in the present value of the stock because of its growth potential. Always invest in companies with good core business fundamentals.
5. Almost every company has a liability in the form of short-term and long-term loans. However, if the loan amount is more than 50% of the market capitalization of the company, it’s probably not a good multi-bagger company. Such companies are seen as risky companies (Hydropower companies in 2020). This is because such companies still have to pay their loan before paying dividends to their shareholders.
6. The company should have a good competitive advantage over its competitors. NLIC had retained 40% of the market share in 2014. CIT has no direct competition. Such companies have strong brand affiliation and amazing business growth rates. Therefore, their stocks were the best performers from 2012-2016. Today, NRIC has no domestic competition at all. The famous investors’ Charlie Munger and Warren Buffett prefer to call such businesses “moat businesses”.
7. The PE ratio is not as important as we think it is because it is often misleading to the people who are strictly following value investing. Some multi-bagger stocks have high PE ratios. A high PE ratio can tell us that the stock is in huge demand. But the high PE ratio can also mean the stock is overvalued. Therefore, it is better to observe the growth of the underlying business as opposed to the PE ratio of the stock.

Disclaimer: Investing can be risky and it can turn out to be hazardous as we grab a wrong notion of investing. So, do not take this article as financial guidance. Always consult a licensed CFO or portfolio manager for your particular investment plans and financial goals.

suraj.wonder.8596@gmail.com