How To Find Multibagger Stocks (How To Analyze Potential Multibaggers)
Many investors are obsessed with identifying future multibaggers. How can you find multibagger stocks? Unfortunately, it’s not easy. In this article, we look at a specific research report that addresses how to find multibaggers.
The main takeaways from the report are that the Nordic region is a great place to invest, don’t be too obsessed with valuation multiples if the company and its management is great, and don’t spend time on companies that have problems. Turnarounds seldom turn into multibaggers.
A new research report called The Makings Of A MultiBagger has recently been frequently “retweeted” on Twitter. Three summer interns conducted a study at Alta Fox Capital in 2020. The results reveal the Nordic region is an excellent place to park your money, and you shouldn’t be too obsessed with valuation multiples if the company is of “high quality”. The results are impressive, but the methodology has significant flaws.
What does multibagger mean?
Let’s first define a multibagger:
It’s a stock that has multiplied its share price several times over a specific time frame. For example, a stock trading at 10 USD ten years ago and now worth 100 a share has multiplied ten times.
The origin of the word multibagger was first mentioned in Peter Lynch’ bestseller One Up On Wall Street in 1988, presumably an expression derived from the sport of baseball.
The safest way to get multibaggers
Most investors dream of finding multibaggers.
Unfortunately, as you’ll learn after reading this article, this is extremely difficult.
The stock market is heavily skewed toward just a few stocks contributing to much of the wealth creation, and these stocks are, of course, not easy to find.
Research shows retail investors underperform the major indices, and we believe most investors are better off investing in a portfolio of different mutual funds. It’s not as exciting as looking for the next multibagger, but if you’re patient, you will indeed have multibaggers among your funds:
The multibagger study’s methodology
The research project aimed to identify common characteristics, trends, and catalysts that turned small-cap stocks into multibaggers in North America, Western Europe, and Australia. Energy, material, and financial stocks were excluded from the database, and the students looked only at data from June 2015 until June 2020 in stocks with a market cap of at least 150 million USD and a maximum of 10 billion USD. A multibagger must have risen at least 350% during this period.
Only 105 companies fulfilled their criteria. The research aimed to identify strategies to find the next set of high-performing stocks.
The seven takeaways to screen for future multibaggers
Below are the seven significant findings from the study:
The Nordic region is overrepresented:
The study found the Nordic region was over-represented among the sample. This is no surprise. Much research has concluded the Nordic markets have produced returns just as good (or better) as the US markets.
The US is under-represented among the winners:
Tailwind from megatrends is important:
The best sectors were technology and healthcare:
