Doesn’t that sound great? Invest in multibagger stocks and get returns that too multi-fold. That is what an investor wants from its asset class.
What interesting about multibagger stocks is the time when you park your funds in them. Investing in large-cap multibagger stocks that have grown and are stable is likely to deliver lesser return than investing in small-cap or mid-cap multibagger stocks. Hence, identifying potential multibagger stocks is difficult and comes with high risk and patience to hold it for the long term.
Selection of stocks that can be future multibagger stocks does not give explosive return initially but may give tremendous return if held for a longer period of time. A simple analogy can be related to the fact that even apple trees do not start producing fruits in the initial period but may take around two to ten years from the time of seedling.
Having said that, one question may arise that how to select multibagger stocks? Are there any ways of choosing ASX multibagger stocks for higher returns?
The answer is- few factors such as the company's performance, outstanding management, future plans and the industry in which it is operating can be the indicators of evolving multibagger stocks.
Industry: Prospective growth of the industry in which the company is operating can be an indicator of multibagger stocks.
Interesting Read: ASX Fintech Multibagger, Come 2020 Wisr Open on Fire
Business: A business irrespective of its market cap size with opportunity for sustainability and scalability can grow in future to become a multibagger stock. For example, ASX-listed Advance Nanotek Limited (ASX: ANO), an advance material technology company, has delivered a stock return of 1260.13% in the last five years.
Strong Management: The other most important aspect is the company’s management. A strong, ethical and visionary management is likely to aid the company in positioning itself among ASX multibagger stocks.
Entry Barrier: The business uniqueness is vital to evaluate multibagger potential stocks. The entry to barrier restricts competition, and hence disruptive business model can charge the premium of its product over competitor products. A company with distinctive technology, patent, IP or even branding of the product can get placed amongst ASX multibagger stocks.
Apart from understanding the essential kernel of business for selecting multibagger stocks on ASX, it is quintessential to determine the company’s valuation. Lower trading valuation is likely to return high value, beating the market for a more extended period.
Low P/E Ratio: Investing in stocks with low price to earnings (P/E) ratio is anticipated to return higher yield in comparison to investing in stocks with higher P/E ratio. A business with low P/E ratio than the industry P/E is generally a good indicator, highlighting the business’ growth potential.
Low P/BV Ratio: The other quite desirable ratio in selecting multibagger stocks are value of stocks in comparison to its book value. Book value is the value of shareholder's equity that includes share capital, reserves and surplus, if any. The other way of determining book value is deducting current liability and debt from total assets.
Hence, the lower price to book value (P/BV) states that the company’s stock price is likely to grow in future to at least its present book value. It has been generally noted that stocks with lower P/BV have generated a higher return in comparison to stocks with higher P/BV ratio.
Low P/NCAV Ratio: Buying stocks at a lower cost than net current asset value (NCAV) is anticipated to give a higher return in future, as it does not take into account fixed assets while valuing the company. One query may arise that why fixed assets and not current assets? This is because current assets can be easily converted into cash in a year and can be of great indicator of the value of the company at the time of liquidating.
As said by renowned father of value investing "Benjamin Graham" - stocks trading at lower NCAV are worth dead than being alive and it's one of the stock selection technique applied by him. Stock selling at lower liquidating value is only due to two facts that stock price is too low, or the company should be liquidated.
Benjamin Graham Magic Multiple: Sometimes, it is challenging to select any of the two - P/E or P/BV - to consider value of stocks to be cheap or not. In this case, "Benjamin Graham" has come up with the magical upper multiple of 22.5 for both P/E and P/BV product, i.e. maximum 15x for P/E and maximum 1.5x for P/BV.
Having said that it is always wise for investors to consider own method of selecting ASX multibagger stocks after proper evaluation and research instead of going with the hot talk of the town. Also, portion of multibagger stocks in a portfolio depends on the risk-taking capacity of investors, purpose of investment and investors’ remaining years to retirement to mention few.
Let’s now glance through few ASX multibagger stocks that have delivered immense return to shareholders. The stocks have been selected on a random basis, considering market cap lesser than $300 million, as on 26 March 2020.
PainChek Limited (ASX: PCK): The five-year return of the stock stood at 128.57%. The stock closed at $0.080 on 26 March 2020 with a negative EPS of $0.013. Its 52 weeks high and 52 weeks low stood at $0.37 and A$0.028, respectively, and the Company has a market cap of $82.84 million.
PPK Group Limited (ASX: PPK): The five-year return of the stock stood at 249.09%. The stock closed at $2.1 on 26 March 2020 with a negative EPS of $0.195. Its 52 weeks high and 52 weeks low was noted at $7.6 and $0.755, respectively, and the Company has a market cap of $162.22 million.
Bellevue Gold Limited (ASX: BGL): The five-year return of the stock stood at 1458.24%. The stock closed at $0.410 on 26 March 2020 with a negative EPS of $0.013. Its 52 weeks high and 52 weeks low was noted at $0.735 and A0.285, respectively, and the Company has a market cap of $244.81 million.
PuriflOH Limited (ASX: PO3): The five-year return of the stock stood at 920%. The stock closed at $2.120 on 26 March 2020 with a negative EPS of $0.135. Its 52 weeks high and 52 weeks low was noted at $6.3 and $1.95, respectively, and the Company has a market cap of $64.31 million.
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