Multibagger stocks and the million-dollar question

Equity markets seem to be on a relentless rally with many stocks turning multibaggers in the marathon since the March 2020 lows. While zeroing-in on them at their lows could have never been easy amidst the doom at that time, identifying multibaggers is not any easy over longer time periods too, shows a BL Portfolio analysis. Over the last decade, 351 stocks listed on the BSE have seen returns multiply by at least 10 times.

In these, a deeper dive into the top 50 multibaggers (with current market cap of at least ₹20,000 crore) reveals that it was difficult not just to identify them but also to hold on to them for periods as long as 10 years. Aside from lack of clear patterns aiding their identification, these stocks also suffered huge drawdowns and prolonged periods of stagnant returns.

Cues from hindsight

While four of the top 50 stocks analysed were already large cap in 2011, the remaining stocks were either mid cap (22) or small cap (24) bets that made their way to large/mid cap buckets.

Was there something that could have foretold the prospects for these 50 stocks? Their cheap valuations could have been an indicator, going by the fact that five of the top 10 in this list were trading at single digit PEs then.

However, as many as 17 of the top 50 multibaggers today, traded at higher valuations than the Nifty 50, in 2011. For example, while the Nifty’s consolidated Price to earnings (PE) was hovering around 16 times in 2011 (as per Bloomberg), Britannia was trading at a PE of over 44 times. The stock moved up 16-fold in the last decade. PI Industries which gained 3,137 per cent, was trading at 24 times PE then.

Were there any sectors which stood out? Sectors such as chemicals, IT and pharma did see more than five names in each segment pop up in the list. But the top 50 multibaggers of last decade were scattered across other sectors too.

Not for the faint hearted

Even if you did get lucky in identifying some of these stocks, chances are you could have exited in the intervening corrections. Multibagger stocks go through several periods of drawdowns before rewarding their shareholders with such superior returns. For instance, the 10-year journey for Bajaj Finance ending with over 190 times returns, was not linear at all. The stock went through at least 8 drawdowns (corrections of over 15 per cent since previous peaks) — some as steep as the 60 per cent drop seen during March to May 2020.

While most of these drawdowns were broader market driven, a few stocks also witnessed corrections due to blips in business fundamentals. Whether to hold on to such stocks or make corrective exits would have put investors in a quandary. For instance, the stock of Mindtree tanked by 31 per cent in October- November 2018 to ₹804 apiece from its previous peak of ₹1162.

This was following the weak outlook commentary from the management, in the earnings call of September 2018. The stock received another blow from L&T’s hostile takeover which ended in July 2019 and it fell to ₹667. However, the stock that now trades at ₹4693, rallied over 50 times since 2011. That apart, for many multibaggers a large part of the rally was bulked up in shorter periods, such as the recent market carnage of March 2020. Persistent Systems, for instance, delivered 3.3 times returns from October 2011 to March 2020. However, the stock has since the lows of March 2020 rallied over 7.6 times to ₹4,207 apiece now.

JSW Steel and Tata Elxsi too saw a similar clustering in returns. So, as efficient as it may seem, it is not easy to time your entry-exit based on broader market moves too. Thus, if you are beating yourself up for missing the gems of the last decade, remember hindsight is always 20/20.