Finding Multibagger Stocks: Combining Metrics, Trends, and Analysis

A multibagger stock is a term used in the stock market to describe a stock that has delivered returns several times its original investment value.

The term "multibagger" was popularized by Peter Lynch in his book "One Up on Wall Street" and is based on the idea of a "bag" representing a return equal to the original investment.

• A 2-bagger stock has doubled its value (100% return).
• A 5-bagger stock has grown 5 times its original value (400% return).
• A 10-bagger stock has grown 10 times its original value (900% return).

Key Characteristics of Multibagger Stocks

Strong Growth Potential

These stocks often belong to companies with high earnings growth rates and a strong business model.

Competitive Advantage

The company typically has a unique product, brand, or service that differentiates it from competitors.

Undervalued

Multibagger stocks are often identified when they are undervalued or overlooked by the market but have strong future growth potential.

Sector Trends

Companies in emerging sectors or industries experiencing high growth often become multibaggers (e.g., technology, renewable energy).

Multibagger stocks are highly sought after because of the massive returns they can generate over time. However, they usually come with higher risk and require thorough analysis, as not all stocks with potential turn into multibaggers.

Financial Ratios to consider

Identifying potential multibagger stocks requires evaluating several financial ratios and metrics to determine if a company has strong growth potential and is undervalued.

Here are some key ratios and indicators to consider:

Price-to-Earnings (P/E) Ratio

A lower P/E ratio compared to industry peers can indicate that a stock is undervalued. However, for growth stocks, a higher P/E might be acceptable if the company has strong future earnings potential.

Price-to-Earnings Growth (PEG) Ratio

The PEG ratio adjusts the P/E ratio for a company's growth rate. A PEG ratio below 1.0 often indicates that a stock may be undervalued relative to its growth potential.

Price-to-Sales (P/S) Ratio

This ratio helps identify stocks that are generating strong revenue relative to their market value. A low P/S ratio can indicate undervaluation, especially for growth companies that are reinvesting profits into expansion.

Return on Equity (ROE)

A high and increasing ROE indicates efficient use of equity capital and suggests that the company can generate strong profits. Consistently high ROE is a sign of a quality business, often a characteristic of multibagger stocks.

Debt-to-Equity (D/E) Ratio

Lower debt levels provide financial stability and reduce risk. Companies with low or manageable debt have better chances of becoming multibaggers because they can reinvest profits into growth rather than paying off interest.

Earnings Growth Rate

A high and sustainable earnings growth rate is a key indicator of potential multibaggers. Look for companies with double-digit growth in earnings over several quarters or years.

Free Cash Flow (FCF) Margin

The free cash flow margin ratio demonstrates how effectively a company converts revenue into operating cash flow capital used for purposes like investments, debt settlements, or dividends to shareholders.

Revenue Growth Rate

Consistent and strong revenue growth is a key sign of a multibagger. Companies that can grow their top line at a high rate, especially if they are in expanding markets or industries, have a higher chance of significant stock price appreciation.

Operating Margin

​High operating margins indicate strong cost control and pricing power. Companies with high and improving operating margins are more likely to sustain profitability as they scale.

Price-to-Book (P/B) Ratio

A low P/B ratio, especially when combined with strong earnings and revenue growth, can signal that the stock is undervalued. This is particularly useful for identifying potential multibaggers in asset-heavy industries.

Bonus Tip: Identifying Trends and Catalysts

In addition to financial ratios, look for companies with strong sector trends or catalysts like:

• Disruptive technology or innovative products.
• Expansion into new markets or successful acquisitions.
• Increasing market share or dominance in their industry.

Using ChartMill to find these multibagger stocks

A good stock screener is an indispensable tool for quickly and efficiently compiling a list of quality stocks that can help you identify promising candidates.

Let's set up a stock screen in ChartMill to identify potential multibagger stocks. We'll use a combination of growth, value, and quality metrics, focusing on companies with strong fundamentals, high growth potential, and a reasonable valuation.

Here are the steps and criteria for the screen:

Market Cap: Small to Mid Cap (under $10 billion)

Smaller companies have more room for growth and often have a better chance of becoming multibaggers.

In ChartMill, filter Market Cap: At Most MID (2B+)

Price-to-Earnings (P/E) Ratio: Below 20 (or industry average)

We want stocks that are not too expensive relative to their earnings.

In ChartMill, set P/E Ratio: Under 20.

Earnings Growth (1-Year and 3-Year Growth Rates): Above 15%

Look for companies with strong and consistent earnings growth.

In ChartMill, set EPS Growth (1 Year) and EPS Growth (3 Years): Above 15%.

Price-to-Sales (P/S) Ratio: Below 3

A lower P/S ratio indicates that the company is generating significant revenue relative to its market cap.

In ChartMill, set P/S Ratio: Under 3.

Return on Equity (ROE): Above 15%

High ROE shows that the company is effectively generating profit from its equity.

In ChartMill, set ROE: Above 15%.

Debt-to-Equity (D/E) Ratio: Below 1

We want companies with manageable debt levels, reducing financial risk.

In ChartMill, set D/E Ratio: Under 1.

Revenue Growth (Last 5 Years): Above 10%

Consistent revenue growth is a good sign of a potential multibagger.

In ChartMill, set Revenue Growth (5 Years): Above 10%.

Free Cash Flow (FCF) Margin: Above 5%

Companies generating strong cash flow are better positioned for growth and expansion.

In ChartMill, set FCF Margin: Above 5%.

Some Optional Filters

The following trend filters are optional, you can use them when you are left with a reasonable number of candidates after applying all the above filters (which will rarely be the case...)

ChartMill Trend Filter

Only select stocks in an uptrend

In ChartMill, set Short Term: Positive and/or Long Term: Positive

Stocks Near 52-week Highs

Stocks near their 52-week highs are often showing strong momentum, which is a good sign for future growth.

In ChartMill, set Price: Within 5% of 52-week High

This is the direct link to the multibagger Trading Idea (worldwide) without the optional filters.

Why this List Will Be Small

This screen sets high growth expectations by requiring both EPS and revenue growth rates above 15%, ensuring only companies with strong earnings momentum will qualify.

It also applies valuation filters, using P/E and P/S ratios to limit the list to stocks that are not overly expensive relative to their fundamentals, effectively filtering out many overvalued growth stocks.

Additionally, a debt-to-equity ratio below 1 excludes companies with high leverage, disqualifying fast-growing but heavily indebted firms.

The Bottom Line: What to Focus On

Keep in mind that this list is based purely on pure quantitative ratios. As discussed earlier in this article, there are also specific qualitative elements to consider.

How is the industry performing as a whole? Does the company have a unique competitive advantage and some form of pricing power? Is the company operating worldwide?

These are all things you should research and include in your analysis before deciding to invest in one or more companies for the long(er) term.

Identifying multibagger stocks requires a combination of quantitative analysis and qualitative research. By focusing on the financial ratios and metrics outlined in this guide, along with sector trends and competitive advantages, you can narrow down your list of potential winners.

Tools like ChartMill simplify the process by providing powerful filters and analytics to help you spot high-potential opportunities with precision and ease.