Life Cycle of a Multi-bagger stock

Cycles are prevalent in all aspects of life, stock market is no different. Today we will look at the different stages in the life of any multi-bagger stock and how to identify these stages.

Long-term period depends on the following:

A. Entry into the stock

  1. Initial Phase – When company has just begun its growth phase and the market is yet to recognize it. Here the period will be longer and the % gain will be the highest. The entry price during this phase is important as it provides a margin of safety. The chances of falling would be high but amount of loss would be minimal. Moreover, all potential multi-bagger stocks have remained in this phase for a long period without any significant rise in stock price. Hence, it requires patience to stay invested in multi-bagger stocks.

         Eg:- In 2007, KRBL was around `6-7, split adjusted or MPS was at `100           in 2012.

         Key Characteristics in this phase are as follows:-

  • Low liquidity
  • Low PE ratio
  • Lack of recognition among market participants

2. Middle Phase – This is a period when company has shown consistent growth of 4-5 years and the market has recognized it through better volumes and reasonable valuations. Here the entry level will be higher but uncertainty of success will be less due to past history and reasonable future growth prospects.

         Eg:- In 2013, KRBL was at `25.

         Key Characteristics in this phase are as follows:

  • Liquidity increases
  • Slowly Institutions as well as MF’s start increasing their stake
  • More media coverage (various brokerage house start covering the stocks)
  1. Last Phase – This phase comes when euphoria builds up and when everybody talks of particular stock or industry. This can be considered as exit phase for long-term investors. Here short-term and day traders get activated.

         Eg:- Current range of KRBL of around `250-275.

        Key Characteristics in this phase are as follows:

  • Re-rating takes place (sharp jump in share price)
  • High liquidity and high trading volumes
  • High public interest

B. Potential in the management:

How fast is the management in adopting technology, reading change in the taste of customers, focused on innovation and R&D, vision of the management as to where they see the company in the coming 5 years etc.

Eg:- Mr. Sundararaman, MD of Shiva Texyarn, with a strong commitment to R&D wanted to create a niche for itself and has had huge success in short span of time in terms of decent orders from Defense sector, sales of its branded products etc. 

C. Growth potential in the industry:

As long as the industry size is growing, one can hold on to the stock. Also, a lot of small-cap companies are industry leaders in their respective industries where they operate and hence, industry growth would directly reflect in their financials.

Eg:- Manali Petrochemicals is the only Indian supplier of Polyols in India or Thirumalai Chemicals and IG petrochemicals are the only producers of Phthalic Anhydride in India. 

D. Operating margins:

Rise in margins with rise in sales means less competition and potential for growth.

Eg:- TNPL and Ramco Cements have industry-leading EBIDTA margins in their respective industries which is possible due to strict cost control and benchmarking industry practices.


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