How does this veteran investor identify multibagger stocks? You should also know the formula!
Veteran investor Raamdev Agrawal has shared his secret formula for identifying multibagger stocks. According to him, investors should stand out from the crowd and choose companies with strong fundamentals but little buzz. He emphasizes investing discipline, accurate valuation (PE/G ratio), and a company's cash flow as more important than paper profits.
How to identify multibagger stocks: Every investor in the stock market is looking for a golden opportunity that can multiply their capital. This is known as a "multibagger" in market parlance. But identifying that one right stock among thousands of companies is like finding a needle in a haystack.
Raamdeo Agrawal, one of India's most successful investors and chairman of Motilal Oswal Financial Services, has a knack for finding such "diamonds in the rough."
How does he stand out from the crowd and identify stocks that are poised to deliver impressive returns in the future? He reveals this in his own investment strategy.
Away from the crowd, look where it's still dark
A key component of Raamdev Agrawal's investment strategy is "finding untapped companies." He prefers to invest in companies that haven't yet gained traction or the spotlight, but whose businesses are inherently strong. To illustrate this approach, he cited the example of Balkrishna Industries.
Agarwal explains that when he bought the company's shares, its market value was just ₹100 crore. The company's fundamentals were excellent, with a P/E ratio of just 1 and a return on equity (ROE) of between 30 and 40 percent.
Despite this, the market was not interested. Agarwal met with the company's management, listened to their story, and believed in their business model. This belief proved vindicated, and within just two years, the share price jumped from ₹100 to ₹1,200.
Along with growth, 'right price' is also necessary
Often, new investors buy a stock simply because it's rising rapidly. Ramdev Agarwal considers this a major mistake. According to him, as important as a company's growth is, the valuation is even more important. For this, he considers the PEG ratio (Price/Earnings to Growth) to be his biggest tool.
Simply put, if a good company has a PEG ratio of 1 or less, it means the stock is cheap or reasonably priced relative to its growth rate. If the ratio is higher, the stock is expensive.
Don't fall prey to FOMO
Discipline is everything in the world of investing, even if it sometimes means you have to miss opportunities. Ramdev Agarwal shared an anecdote about his experience with Asian Paints, which is a lesson for every investor. He wanted to buy Asian Paints shares, but at his own fixed price.
When the stock was at ₹20, he was waiting for it to reach ₹15. When he decided to pay ₹20, the price rose to ₹25. Finally, when he agreed to buy at ₹23, he stopped on a friend's advice, hoping the price would fall. But the price didn't fall; instead, it climbed to ₹90.
Agarwal didn't make a penny in that historic rally. Despite this, he has no regrets. He believes that it's better to let the opportunity pass than to buy shares at the wrong price due to FOMO (fear of missing out). Discipline is the key to lasting a long innings in the market.
Don't just look at profit figures, keep an eye on cash too
Seeing profits on paper and actually seeing money in your bank account are two different things. When evaluating a company, Raamdev Agrawal places a strong emphasis on its ROE (return on equity), preferring companies with an ROE of at least 25%. But he doesn't stop there.
He also examines how quickly a company is able to recover its money from the market. If a company has excellent ROE, but it takes 100 to 120 days to receive payments after selling goods, this is a red flag.
Agarwal says that "cash flow is king." If a company's money is stuck in the market, balance sheet figures can be misleading. Therefore, investors should closely examine not just profits, but also a company's ability to recover cash.