Multibagger stocks are stocks that increase in price more than their initial cost by at least two times. The term was popularized by Peter Lynch, who is one of the most iconic Wall Street fund managers. Peter Lynch has been one of the biggest advocates of conducting fundamental analysis in order to find the right stocks. Over his long career, while managing the Magellan fund, Peter Lynch found several multibaggers.
How to find multibagger stocks?
The simple is that you have to look where others are not looking. There are thousands of analysts covering the same stocks in Wall Street and across the world. If you are an individual investor you need to have an edge in order to invest in multibagger stocks. One of the simplest ways is to look where others are not looking. By doing so you gain an advantage over the market that tends to focus on the large caps. The reality is that you will not have any informational advantage over a large fund or one of the several hundred analysts that cover some of the largest companies in the world.
Instead, you should try to focus on stocks that have a smaller market cap. These undiscovered gems are often unfollowed by most analysts in large investment banks. An investment bank will hardly be able to follow any stock with a market cap under $1 billion. Therefore focusing your energy and resources on this seems to be the best alternative.
There is also another advantage of focusing on smaller companies. The amount of research you have to do in order to value a stock like Google will be the equivalent of analyzing five other small caps. The reason is that in order to thoroughly research a large-cap, you have to look at all of their segments. In essence, this is like researching several smaller companies due to the size of large conglomerates.
Look in other regions
Most investors and investment banks research, and cover stocks in Europe, and North America, Some of them are not willing to invest in other regions. This gives you a great advantage over them. This is one of the best ways to find multibaggers stocks. Another approach is to look at the OTC (over-the-counter) market. Many of these companies have a very low market cap, and therefore they are disregarded by most investors and large investment banks. This is another way to find multibagger stocks, that can help you beat the market.
Why small caps are more likely to be multibaggers than large caps
One of the most important aspects of finding multibagger stocks is to look for companies that are smaller. A smaller company is much more likely to be able to double or even triple its revenues and earnings. On the other hand, a company like Apple, which currently has a market valuation of over $2.6 trillion will have a much harder time growing its earnings by two or even times. Therefore, it is more likely that you are able to find multibagger stocks among small caps.
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