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:
We can argue both technology and healthcare get a boost from the structural change in globalization. However, that doesn’t mean it’s easy to pick winners. Just a few companies take most of the markets:
Consumer staples tended not to outperform as often, but we would assume they are also less likely to go to zero.
High multiples can still generate fantastic returns
Many of the companies already had high multiples in 2015. If you get it right and the company grows its business, you can still make exceptional returns:
Revenue growth is important to become a multibagger
Just like Philip Fisher wrote several decades ago, revenue growth is a good indicator for future earnings. It’s next to impossible to tamper with the revenue, while earnings can easily be “manipulated”.
Multibaggers often make acquisitions
Acquisitions were vital to 56% of the revenue growth. M&A is tricky to perform, but many organizations/management have the skills and knowledge to create value via acquisitions. By looking at the history of the acquisitions made you get a pretty good indication of their abilities. However, be aware of significant and transformative acquisitions. Just one deal can ruin the company.
Turnarounds seldom turn into multibaggers
None of the winners were “turnarounds”, i.e. companies that might have suffered temporary setbacks and is now looking for ways to turn around their business. The authors suggest investing in financially healthy companies.
Multibaggers need a moat around their business
The study recommends investing in companies that have an advantageous position in the markets (called moats by Warren Buffett). The most likely moat is via the network effect, but cost advantages, intangibles, and switching costs were mentioned.
Survivorship bias and hindsight bias
The whole study is, unfortunately, based on hindsight bias.
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