What Are Multibagger Stocks (Explained: All You Need To Know)

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What are Multibagger Stocks?

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Let me explain to you what Multibagger Stocks means and why they are important!

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What Are Multibagger Stocks

In investing, the term multibagger stocks refer to company stocks with the potential of earning multiple times their acquisition cost.

In other words, if you purchase a stock that can appreciate multiple times the value of what you paid for it, it is considered to be a multibagger stock.

For instance, a stock that is able to double in price is called a two-bagger.

A stock that is able to triple in price is called a three-bagger, and so on.

A multibagger is a stock that can increase “multiple” times what you paid for it.

In many cases, multibaggers are stocks that are undervalued and have strong fundamentals.

The main characteristics of multibagger stocks are that they tend to have high growth potential, great management, and high demand for their product and services.

Keep reading as I will further break down the meaning of multibagger stocks and tell you how to spot them.

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Why Are Multibagger Stocks Important

Traders and investors looking to earn good returns on their investments will generally want to invest in stocks that will appreciate over time.

One investment option that is highly sought after is to find stocks that have the potential to increase in price by several folds.

Multibaggers are great investment options as they are stocks that have the potential of increasing in value several times what you originally paid for them.

For example, if you invest in a stock that appreciates 10 times in value, you have a multibagger stock on your hands.

If you paid $10 per share and the stock price appreciates to $100 per share, you effectively have earned 10 times your original investment.

Multibagger stocks tend to be undervalued stocks having strong fundamentals.

Value investors are those that continually search for undervalued stocks hoping to “bag” their original investment multiple times.

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How To Identify Multibagger Stocks

Although there is no science behind the method investors use to identify multibagger stocks, there are however a few things you should look out for.

The first thing you should assess is the company’s overall debt level.

If the company’s debt level is on par or below the industry average, it means that the company exposes investors to lower levels of default risk and liquidity problems.

The second aspect to consider is the company’s revenues on a quarter-per-quarter basis.

Typically, multibaggers will not have high multiples in total, but their operational revenues are healthy.

You can also detect multibaggers by assessing the company’s source of revenues.

Is the company generating revenues from areas that have the potential to grow and are easily scalable?

The more a company generates from profitable segments with room to grow, the more the company has the potential to grow over time.

Another hint that you may have a multibagger stock is that the company’s trailing 12-month earnings-per-share and revenue arrive at the current price-per-earning and price/sales ratios.

To the extent the price-per-earning ratio is increasing faster than the stock price, you may have a good chance of having a multibagger stock.

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Why Invest In Multibagger Stocks

Investing in multibagger stocks is evidently quite attractive as you have the potential of earning multiple times the value of your original investment.

Many traders and investors wish to find a few multibagger stocks in their lifetime so they can dramatically increase their wealth.

We have seen famous investors like Warren Buffett that have been able to amass a massive fortune by looking for undervalued stocks and heavily investing in them.

A multibagger stock that is able to offer you 100% to 1,000% your original investment is surely a great investment option.

Savvy investors who are able to find and invest in multibaggers generally do not consider they are taking a significant amount of risk.

Since they are finding companies with strong fundamentals, great management, high-growth industries, and with a healthy balance sheet, they do not consider that the investment will expose them to important risks.

This is not to say that the investment is risk-free.

However, since multibagger stocks tend to be undervalued stocks that have strong fundamentals, the stock of these companies may have dropped temporarily due to an event that is unrelated to the true financial health of the company.

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What Is A Multibagger Stock FAQ

What does “multibagger stocks” mean?

The term “multibagger stocks” refers to a stock that has the ability to return many times over the investor’s original investment.

If the investor purchases stocks for $10,000 and the stocks appreciate $100,000, this is a multibagger stock as the stock returned ten times the investor’s original investor.

What is the origin of the term multibagger stock?

The term was originally coined by Peter Lynch, a famous investor, in his book “One Up On Wall Street”.

In his book, Peter Lynch referred to stocks that had the potential of increasing in value multiple times over.

Today, the term multibagger stock refers to a stock that has the potential of earning high returns in a short period of time.

How do you pick multibagger stocks?

Every investor may have a unique way of finding multibaggers.

However, the most common features you should look for are:

• The stock’s PE ratio
• Company performance over previous quarters
• D/E ratio
• Revenue multiples 
• Company’s industry
• Company source of income 

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Takeaways 

So there you have it folks!

What are multibagger stocks?

In a nutshell, multibagger stocks refer to equity stocks that have the potential of generating high returns in a relatively short period of time.

This term was coined by Peter Lynch in his 1998 book called “One Up On Wall Street” where he used a baseball analogy where “bags” refer to “bases”.

Typically, investors consider a multibagger to be a stock that generates more than 100% return.

For example, a stock going from $5 to $50 per share is a multibagger.

Now that you know the meaning of a multibagger stock, good luck with your research!

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