How to Pick Multibagger Stocks: Lessons from the Titan Case

Every investor dreams of picking that one extraordinary stock that skyrockets in value, turning a small investment into an abundant fortune. But is there a way to increase the odds of identifying these so-called 'multibaggers'? Here's a 5-step framework drawn from the experience of investing in Titan, the watch and jewelry company.

Three Key Takeaways

1. Picking multibaggers demands a diversified approach, patience, and a contrarian mindset.
2. The industries and companies chosen should have a high growth rate, and the stocks should be bought when trading at a low PE with future EPS growth potential.
3. Turnarounds, emerging mega trends, the potential to become a market leader, and relatively low pricing are all crucial factors in identifying potential multibaggers.

The Remarkable Case of Titan

The investment journey of Indian billionaire investor, Rakesh Jhunjhunwala, with Titan is a compelling lesson in identifying multibaggers. Having invested in Titan at INR 3 in 2002, the stock today trades at INR 3000+, generating an astonishing 1000 times gain.

A closer look at the journey reveals:

• Depletion of profits from 2000 to 2002.
• Serious internal problems including union strikes and management issues.
• Investment done during a time when the company was not an obvious selection.
• The rise of the mega trend of growing discretionary income in India, which tremendously benefitted Titan - especially the gold segment-.

5-Step Framework for Identifying Multibaggers

1. Diversify: To discover a multibagger akin to Titan, investors must diversify their investment portfolio across a host of stocks. In such a scheme, some stocks might perish, and others will register ordinary returns. However, a tiny portion could turn into multibaggers, covering for all the rest and delivering an exceptional overall yield.

2. Buy at low PE, bank on EPS growth: Companies trading at a low price-to-earnings ratio with prospective earnings-per-share growth could turn into multibaggers. An example here is Equitas Small Finance Bank, which is growing EPS while trading at a reasonable PE.

3. Embrace contrarian investments: Betting against the market consensus can lead to finding multibaggers. For instance, investing in the gaming industry (Delta Corp and Nazara Tech) during a period when the collective sentiment is negative can yield drastic returns if the thesis of industry growth holds.

4. Bet on potential market leaders: Companies that can turn into market leaders in their respective niche segments are likely multibagger candidates. The primary competitive advantage for these businesses often lies in their capacity to bag new contracts, which can drive significant growth.

5. Invest for the long term: It's essential to stay invested for the long haul to reap the true benefits of a multibagger. Significant appreciation in stock price often happens over extended periods with phases of stasis in between. The key is to assess the ongoing potential of the industry and the company’s market leadership continually.

Words of Caution

While the framework can aid in the search for potential multibaggers, it's crucial to acknowledge the associated risks. Not all chosen stocks will perform well – some might even lead to substantial losses. However, with the mixed bag approach, the gains from multibaggers can offset the losses from others.

Conclusion

Finding the next big 'multibagger' isn't straightforward, but it's certainly not impossible. It requires a unique and diversified investment strategy, a fair amount of courage, and above all, patience. The emphasis must be on understanding the fundamentals and the potential of the company, rather than just the stock price. If the fundamental elements and market trends align, the recipe for a multibagger could well be in hand.