This is a key question in every small cap investor’s mind. How to identify a multibagger early & hold on for outsized returns? It’s easier said than done!
But AI believes, it can be done if we learn how to evaluate a small cap stock with a robust & ever-evolving process. The key characteristics to look out in a small cap stock is quite different from large caps. We, at AI, have an applied process in place to identify next multibaggers. With it, we are sure that we are gonna hit bull’s eye more than often.
Below are key pillars of our process while searching for a multibagger. Of course, you can outsource this to us by subscribing to our service (click here) but we also encourage our readers to slowly ingrain the concepts of small cap investing. It will be very good on a long run & you will know what you are heading towards.
- Low Debt: AI likes a small cap with no or little debt on the books. A debt laden small cap is very susceptible to economic volatility. There is a very strong co-relation of small companies even with great products which fail to make an impact since their finances are mismanaged. With little cashflow of a small cap, servicing debt becomes a huge problem & it throttles company’s future growth. Even if they are able to survive all this, it will takes decades for them to grow with large amount of borrowed money. AI does not wants to get into such traps, we can wait or search for another opportunity rather than hopping on for such a ride.
- High Cashflow: A high cashflow means company is not going to mortgage its equity to generate cash. It’s more organic way of growing & we like it. Last thing we want is equity dilution. We want company which is self funded. A self funded company invariably becomes sustainable, repeatable & profitable. We can take inspiration from India IT companies, because of their lean working model and high cashflow, they were able to scale up without much loans. Same is not true for mechanical or energy sector companies. For example Suzlon, it took too much loan for inorganic growth & it drowned them. Once a part of sensex, it is now nowhere close to where it should have been. All because it lacked above qualities.
- Management skin in the game: Nothing is more important for a small cap stock than its management quality. We look for promoter pledging, their stakes in the company & changes in shareholder pattern for last couple of years. Focus, energy & intelligence is what it takes to re-rate a company & launch into the next orbit. Look at Eicher motors, Siddharth Lal changed it with his passion and energy. He got involved into designing & production lines & results are for us to see.
- Presence of less or no institutional money: Even if you have identified a multibagger, it matters a lot at what time you jumped into it. Most of the multifold returns come once FII or DII joins the party. AI likes a company where there is not much of institutional money in it. This is an unbeatable advantage for all small investors since they can go deep into the market cap to find such stocks where institutions can not invest because of their mandates.
- Per share revenue growth: AI believes in long run it’s earning per share that matter more than overall revenue or profit growth. We look for business which has low outstanding shares and mostly common shares only. A lesser warrants or options as a percentage of outstanding shares is a big plus in our view.
If you liked this article, please share it with your friends on facebook or whats app or email them link. That’s all we want from you in form of appreciation.