With the benchmark Indian Indices, the BSE Sensex and Nifty touching new lifetime highs in the first week of January 2021, many stocks are trading at their 52 week highs. Some stocks which generated multibagger returns in 2020 include KRBL, Glenmark Pharma, Jubilant Life science, Aurobindo Pharma and Adani Green.
Rather than investing in stocks which are currently overvalued it makes more sense to invest when market correction gives an opportunity or to invest in those stocks which have the potential to become multibaggers in 2021.
In this article, let's take a detailed look at finding the best multibagger stocks for 2021.
What are multibagger stocks?
Multibagger stocks are stocks that can generate multiple times returns compared to the price at which one has purchased it. Some of the essential characteristics of multibagger stocks include enormous growth potential, sound management and strong corporate governance.
There are thousands of stocks listed on India's top stock exchanges the BSE and NSE. However, only a select few of these stocks may turn out to be the best multibagger stocks for 2021.
The below checklist can guide you in identifying multibagger stocks for 2021:
Does the company have good historical performance?
Good historical performance should never be considered the only reason to invest as it may not be guaranteed in the future. However, it is still a strong indicator of what one can expect from the company in future.
Any company with a consistent record of earnings growth over a long-term period, such as five years or more has a great chance of becoming a multibagger stock in the future.
Does the company have zero debt or low debt?
Heavy debt can be a severe burden for any company despite profits as a significant portion of the profits will be used for servicing its debt. This implies that the company will not be able to use its excess fund for expansion of capacity. On the contrary, a company with zero or low debt can use its surplus funds to expand the business or further diversify, resulting in new revenue streams.
Is the company well managed professionally?
Companies with a history of good corporate governance and are well-managed professionally often become market leaders in their segment. Well-managed companies like TCS, HDFC Bank and Maruti Suzuki have created massive wealth for their shareholders over the years.
Some other pointers to keep in mind while looking for multibagger stocks for 2021:
Does the company offer a unique product or service and operate in an industry with low competition?
A company which offers a unique product or service enjoys a huge advantage in the absence of significant competition. With time this advantage will also reflect in the company’s financials positively.
Is there a high demand for the company's products or services?
Companies like HUL, Britannia, Asian Paints and Eicher Motors have generated huge multibagger returns for their investors. An important reason for this can be attributed the huge demand for the products and services offered by these companies.
For example, Eicher Motors was the only company in India offering classic motorcycles until 2018. Despite the entry of new products recently in this segment by competitors, Eicher Motors has managed to hold its position as the market leader thanks to huge customer loyalty and its brand recall value.
Is the stock available for investment at the right valuation?
It is very important to invest in a multibagger stock at the right valuation. It makes absolutely no sense if you invest in the right stock at the wrong price as the potential upside maybe limited.
The above pointers can help investors to identify the best multibagger stocks for 2021. However, if you do not have the time or the expertise to analyze stocks it is highly advisable to seek professional advice. Click here to invest in a portfolio of 20-25 multibagger stocks for 2021 chosen after detailed research by our team of experts.