A multibagger is a stock that returns more than 100%. A stock that returns 400% is called a 5 bagger (returns 5 times the investment ) and a stock that returns 900% is called a 10 bagger (returns 10 times the investment).
Not every stock in your portfolio is going to be a multibagger, especially if your holding period for stocks is short. But multibagger stocks can make a big difference to your portfolio.
What to look for in multibagger stocks
A Wide Moat
Moat refers to the sustainable competitive advantage the company has in the marketplace. A wide moat allows the company to grow or maintain market share without its competitors eating away its profit margins.
Market size
The company should be in a market that has the potential to be huge in the future, even if it is not big today.
Capex needs are low
Capital intensive industries are oil and gas, mining, etc. These companies need a lot of capital to expand their business. On the other hand, a company like Facebook spends relatively a small portion of their cash flow in capex. Companies that have lower capex needs can grow their operating margin as the business grows.
Best industries to find multibaggers
SaaS
Instead of installing software on their PC, SaaS users subscribe to the software, which runs in the cloud. This business model allows SaaS companies to generate monthly revenue rather than one-time revenue by selling the software. SaaS companies tend to have high margins and customers usually stick around, which improves profitability long term.
Technology
Technology companies introduce new technologies that disrupt entire industries. As such, technology stocks are good places to find multibaggers.
Healthcare/Biotech
Healthcare is an industry that is known for innovation. New drugs and treatments are released every year. In many cases, companies get patents that give them a monopoly over the market for a period of time.
Social Media
Social media platforms such as Facebook, Twitter, and Linked in have changed how people interact with others in their personal and professional lives. These platforms have billions of users, which the companies can monetize and grow.
Managing Multibaggers
Buy and Hold
To have multibaggers in your portfolio, it is key to hold the stocks for a long time. Time in the market matters. You can’t trade in and out of them to make big gains. Buy the right companies and sell them rarely. Buy and hold will also allow you to keep your taxes low compared to trading these stocks.
Drawdowns
No stock goes up 10 times in a straight line. These stocks encounter drawdowns – sometimes 50% or more. Multibaggers such as Apple and Amazon have had several 50% drawdowns. During these drawdowns, it felt like these companies have big challenges ahead and their path ahead is difficult. But you need conviction to stay with them and not sell these stocks during these drawdowns.
Bottom Line
Multibaggers are stocks that return more than 100% of your investment. A few multibaggers can make a huge difference to your portfolio. Multibaggers have a competitive advantage in their space and can grow over time while keeping their margins intact. Holding these stocks long term is key to getting big gains.