In 2013, I had never heard or experienced the compounding power of a stock. I was an amateur investor unaware of the wonders of the stock universe.
Over next 3 years, 5 stocks in my portfolio transitioned from the league of ordinary stocks to multibagger stocks. These 5 gems made me experience the positive changes they can bring to your life. How they can set you free to pursue things you love or make time for people you care?
Let me share my definition of a multibagger stock with you.
A multibagger stock is a superstar in making who holds the promise to make you experience the riches, life has to offer. A multibagger is a stock that multiplies your wealth 2X, 3X, 6X…..10X..100X or may be more. It is a stock that lies hidden from the eyes of common man. It is seen by those who are curious to know things a bit more than the others.
Let me share an example which will inspire you to find your next multibagger stock.
Rakesh Jhunjhunwala, an Indian billionaire investor, had bought 6 crore shares (number of shares) at 3 Rs a share, valuing his investment at 18 crores in Titan Company between 2002-2003. Do you know what his stake in Titan was valued at as of June 2019? Any Guesses?
Before I write any further, note the number of years Rakesh Jhunjhunwala has been holding shares of Titan. Around 16 to 17 years. Sufficient time for a newborn to become a teenager. How long do you hold your shares?
Everyone in the world of investing is busy finding that next underdog which holds the promise of creating insane wealth. In fact, I am sitting here today, investing in stock market and blogging because skill and luck made me stumble upon a few multibaggers early on in my investing career. Therefore, I have not only heard about multibaggers but also experienced their power of compounding in my life.
Want To Find Mulitbagger Stocks, Then Put On Your Thinking Cap
Stay with me people. Don’t you get carried away. In order to find these budding superstars of tomorrow you need to develop a certain kind of mindset. A mindset that is inquisitive and observes things in more detail. These multibagger companies often exhibit certain characteristics which become visible if you are consciously looking for them as an investor.
It’s not the financials alone that provide the clue. Rather 50% or more of the finding process is subjective. An investor must have a vision for the future. He/she should be able to envisage the sectors that are going to do well in the future.
An investor should conduct thought experiments like when you see or like a product you should not just stop there. Rather follow it up with a sequence of questions in your mind.
Folks this post is about such questions which are subjective in nature and can’t be quantified. You just need to think to sight the next opportunity. With this in mind let us now ask ourselves a few questions that may help us in finding your next multibagger stock. I will try to explain each characteristic with a real life example. Let’s begin.
1. Does the company enjoy a high entry barrier or monopoly?
For a small company to become big there needs to be a strong barrier that prevents other players from entering its area of business. You either need to build your brand, or you need patents or exclusive licenses, or you enter those areas/niches where the big players do not want to enter as its too small a space to do business for them or you have a big network like Facebook, Uber or Instagram.
These barriers provide the company with a Moat which is a competitive advantage that a company enjoys over a long time. Legendary investor, Warren Buffett envisioned Moat through Toll collection booths. In order to get from one side to the other, you need to pay the toll. There is just no escape to it unless your vehicle can fly. So the toll collection company enjoys a monopoly as no other company can operate that particular toll booth.
In order to spot a monopoly you need to be inquisitive. How? Let us understand this with an example.
IGL- The CNG Gas Distributor
Imagine you are a resident of Delhi/NCR. You often see CNG (compressed natural gas) pumps and there is only one name written everywhere i.e IGL (Indraprastha Gas Limited). You should think that why is only IGL operating these CNG pumps. Now if you are not inquisitive you may just not bother but every brand that you see or read somewhere could be a potential investment. It can make you money. It’s that simple. Just look around a bit more carefully than before.
So if I chose to be a bit more inquisitive about IGL, I will go home and follow this 3 step process to find out more details about IGL (This search process is suited for Indian companies but you can use similar search to find details about companies listed on other international stock exchange):
1. Search google for “IGL company india” and see if you can find a page which displays its full name and more detail about what it does. Of course this is not the only way to search. You can try your other search options to find more about IGL.
2. Once you have found the full name of the company you can continue to search for “Indraprastha gas share price india” to check if the company is listed on the stock exchange. As you can see below, the company is listed on NSE (National Stock Exchange)
3. After confirming that the company is listed on stock exchange you can study more about the stock by searching for “IGL stock research report” and clicking on the various search results as shown below.
4. There is also a website named valuepickr.com which is an online forum for discussing stocks listed on Indian stock exchange. This is an excellent forum for reading or sharing your views. You can read through the posts to learn a lot about a stock and the latest developments happening in a company.
You can search for IGL or any company by entering the name in the search bar.
Therefore next time you see a brand for the first time you can repeat the above search process to learn more about a company.
After having explained the search process let us now get back to the monopoly enjoyed by IGL.
Why Indraprastha Gas Limited Has Been A Monopoly?
IGL is a city gas distributor (CGD) in Delhi NCR (National Capital Region). A CGD is responsible for transporting and distributing compressed natural gas to domestic, industrial or automobile sector in a region. For this a CGD has to lay gas pipe lines.
In CGD business, a company needs to bid for a license to build infrastructure and market CNG in a region. Once a company secures a license for a particular region, it gets exclusive rights to create infrastructure like lay and operate gas pipe lines and no other player is allowed to build infrastructure in that region. Usually infrastructure licenses are given for 20 years and can be further extended.
Similarly they get a marketing exclusivity which means no other player can market CNG in that particular region.
Thus, IGL has infrastructure exclusivity until Dec-2023 but its marketing exclusivity expired in Dec -2011. Despite the marketing exclusivity for IGL expiring no other player has entered Delhi NCR because IGL enjoys the first mover advantage. IGL therefore has a entry barrier in the form of exclusive operations which prevents other players from entering the market.
To add to this is the high pollution level Delhi is grappling with. As the company provides a much cheaper and cleaner alternative to petrol or diesel, IGL hit a sweet spot. The investors have been rewarded too. Have a look at the stock chart below.
As an investor it is a icing on the cake if you can find such a company which enjoys a monopoly. So folks. Keep looking for names of companies wherever you go to find your multibagger stock.
Does The Company Operate in A Duopoly/Oligopoly?
Similar to a monopoly, a company could operate in a segment which has only two players dominating the market. For example, there are two major lead acid battery manufacturers in India. One is Exide batteries and the other is Amara Raja batteries. Most of the cars come fitted with Exide or Amaron batteries.
Another example is payment network providers, Mastercard and Visa.
Similarly if the market is dominated by a few major players then it is called an Oligopoly. An example that I came across while researching stocks is that of Vidhi Speciality Food Ingredients Limited. Vidhi is a leader in synthetic food colour segment.
Food colours are used in packaged food products to provide the desired colour. This industry is heavily regulated and the players have to apply for a lot of certifications and approvals. There are only a handful of players in this segment namely, Sensient, Roha Dyechem, Vidhi & Dynemic Products.
Therefore one should look for companies that may have a monopoly like IGL, a duopoly like Exide or Amara Raja Batteries or an oligopoly like Vidhi Speciality Food Ingredients.
2. Is the company trying to build a brand ?
In order to distinguish itself from the competitors a company needs to establish its brand. They have to create so much awareness about their brand that when a consumer thinks of a product or service, he or she should think of only one name.
For example, when you think of soft drink, Coca Cola may be the first your brain may recall. Similary McDonalds for burger, Pizza Hut or Dominoes for pizza, Bisleri for water bottles in India. Such is the power of brands. They implant this thought through advertisements and logos that that when you think about a burger your mind should command you to go to McDonalds.
Once a brand becomes popular it is difficult for the competitor to sell his products. The reason is simple, the dominant player has established a brand image in the minds of consumer and this brand image is a perception which is not easy to change.
Astal Polytechnik, now known as Astral Pipes is a Chlorinated polivinyl chloride (CPVC) pipe, uPVC (lead free) pipes manufacturer for plumbing and drainage solutions in India. In order to create a brand for itself, company tied up with the Bollywood movie “Dabangg 2”. In this movie there is a scene where the hero, Salman Khan uses Astral pipes to fight the villains. This move brought the brand Astral to limelight. Did you miss the ad?
Another company that is known for its funny ads that stick to your memory are that of Fevicol, a very popular adhesive from Pidilite Industries, India. Pidilite Industries turned a commodity, an adhesive in to a brand name using ads that are witty, funny and with punchy headlines.
Stocks of both companies have been multibaggers. Thanks to the power of brands which give them an edge over competition. Pidilite Industries multiplied approximately 29 times from 2009 lows until 2019.
Therefore always note down a new branded product that you come across. Don’t miss these brands. Be curious to know more about a product or a service you like. These are potential companies in which you can invest and make money. The only thing that you need to do is to not miss these details.
By the way have you tried this Coffee brand, “Continental Coffee“. This winter try it out.
3. Are products or services provided by the company required to be replaced often ?
For a company to sell its products it should be selling a product that needs to be replaced quite often. Let us consider the earlier example of Page Industries, the licensee of Jockey in India. Can you imagine wearing the same innerwear for 3 years? Will it last that long? I hope the answer is not Yes.
So as a consumer you will have to keep buying new innerwear within a year. This provides a replacement demand for Jockey’s products. I love to be invested in such a business which has a high replacement demand and is a basic necessity. You just cant do without it.
Therefore as an investor when you go to malls or other retail outlets you should keep an open eye for things that you can’t do without and which need to be replaced in short intervals. If you start liking a product try searching for the company that manufactures the product.
For example, if you liked Jockey’s innerwear then you can follow this 3 step process to find more about the company.
You can repeat this process for finding stocks of companies or brands you like.
As an investor you need to try such thought experiments. For a man to become wealthy he/she has to keep an eye on the opportunities. If you just go to the mall, have fun and come back then that’s a different story but a person who wants to be rich is scouting for opportunities everywhere. But don’t overdo it as its good to be in the present.
So develop the mindset to be inquisitive. Ask questions to yourself.
4. Does the company operate in a market segment that has huge runway for growth ?
This is a very important question to consider because once you find the right sector which is just opening up and has a huge addressable market; Boy you can be rich.
For any company to prosper and become a big fish it needs to be present in a market segment which has huge potential for growth. For example, consider MRF, the tyre manufacturer or Maruti Suzuki or Hero Motocorp.
I am quite fascinated by the opportunities India as an economy presented in 1990’s. Wish I was aware of what a stock market is as a 6 year old back then.
Looking at the population of India back in 1990’s one could have guessed that all these people will need to travel. This necessity to travel will generate a huge demand for cars or two wheelers. Since you can’t have automobiles without wheels, you will need tyre manufacturers. There was a huge market waiting to be tapped in automobiles and tyre manufacturing as India’s economy grew post liberalization in 1990’s.
And look at the result. While Indian tyre market is approximately a 60,000 crore market today. As of 2019, India is the 4th largest automobile market in the world, surpassing Germany in terms of sales (source https://en.wikipedia.org/wiki/Automotive_industry_in_India)
When there is a big opportunity then a company can grow its sales for a long period of time and as an investor you just need to enjoy the ride by being parked in the shares of the company.
Madras Rubber Factory. A Multibagger Stock & It's Runway For Growth
Sales of MRF had crossed 200 crores in 1984. Was that great? May be but 200 crores is nothing considering the sales number it reported as of Mar 2019. A whopping, 16,062 crores. What a journey? This is what happens when a company is in a sector which has long runway for growth.
Correspondingly the investors have been rewarded handsomely. Have a look at MRF’s stock price below. That stock chart right there is some serious wealth creation.
By the way the stock chart below does not do justice to this star performer. As per the article from businesstoday, stock of MRF traded at 11 Rs a share in 1993 and trades at 66,400 Rs a share as of today.
So what do you think? Can you think of the next sector that will provide such runway for growth? You can share your thoughts in the comments section below. Keep thinking guys. Forget the petty things in life. Change your mindset to see the big picture. Introspect more.
5. Do you think there is something different about a Company's product, something that makes its products superior to others?
Be it life or business you will always have competitors. So when you start a business your products or services need to have something that makes you stand out in the crowd. You can’t make more money by doing the same thing as your next door neghbour.
For example, when you think about innerwear segment in India there are a few brands that come to your mind. Like Jockey, VIP, Rupa, Lovable or more.
Do you know that before Jockey entered Indian market they already had competition from likes of VIP, Lux, Dollar, Loveable etc.
Page Industries, run by Mr. Sunder Genomal, is the exclusive licensee for manufacturing and distributing Jockey in India. Mr. Sunder Genomal had to establish Jockey as the go to brand for innerwear in India. So how did he and his team do it?
What Made This Jockey Win The Race
Well. Jockey kept its focus on the premium innerwear segment. I still remember how embarrassed people felt while entering small shops selling innerwear. Even the shop keepers would hide these products and would display the products only on being asked. They were rarely on display.
But look at Jockey. They thought differently. They advertised their brand by stitching Jockey on the waistband. They had exclusive display outlets for Jockey and had bold ads promoting their products.
Jockey created the slogan “Jockey Or Nothing”
Another important thing is that Jockey always had a great product all along. Be it their style, fitting, quality of products or the packaging of the innerwear. They were always ahead of the competition from the beginning. Jockey created that sense of premiumness in its products which other competitors were missing. They brought style along with quality in innerwear segment.
There may be many other factors responsible for success but we can clearly see how thinking differently, by focusing on quality, by displaying Jockey on the waistband, by changing the mindset of retailers which Jockey did by convincing large store owners to display their products are examples of things done differently by a company.
This characteristic about a company is difficult to spot but always make a note if you have used products of a few different companies. If you can find a product to be superior, more durable, more reliable then go ahead and search for it.
Before We Close
I hope you will continue your search for multibagger stocks. So go around, travel with peace of mind, use products but do keep an eye on something you like or a new brand that you come across. Who knows you may have just unearthed the next billion dollar opportunity.
Let me know if this post was helpful by writing your comments below and if you liked the post then don’t forget to share it folks. Let’s be rich. Let’s find the next multibagger.
Disclaimer: Stocks mentioned in the post are only for tutorial purpose. Author does not recommend any stock. Please do your due diligence before investing.
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