Author : Nishith Shah & Siddhartha Bhaiya
There is only one reason why you are in the stock markets – to make money and the one trait common to the majority of the people who have made truckloads of money in the stock markets is the ability to identify and own multibaggers.
In the markets, we have heard of various investing strategies like growth investing, value investing, contrarian investing, etc.
What if we told you that to find the real multibaggers you don’t need just one of those approaches but a combination of all of them. One might say that it’s a tough task to blend all three strategies into one but then to find outliers (multibaggers), one ought to be willing to do the difficult things. At Aequitas, we have a proven ability to identify and own multibaggers, so much so that our entire portfolio is a multibagger. (Our portfolio is a 12 bagger over the last 9 years and we have more than 15 stocks that have gone up more than 500%).
So, let’s break down the three pillars of our multibagger approach.
Value
“The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.” — Peter Lynch
The cornerstone of investing is to buy assets at a discount to their intrinsic value (don’t listen to anyone who tells you otherwise). In the markets, stocks gyrate from 10% of intrinsic value to 500% of intrinsic value. Stocks through their bull market cycle move from extreme pessimism to wild optimism. So it’s important that you buy stocks not just at fair value but at a significant discount to intrinsic discount.
In fact, value according to us is the single most important parameter for investing. The chances of you losing money in the long run, if you buy deep value is very low. We are sticklers for value, and we would seldom overpay for a business. The valuation of the company has to be reasonable on an absolute basis for investment. A basket of deep value stocks spread across industries gives you a significant advantage in building a multibagger portfolio.
Growth
“Past corporate successes are only frail guides to future good fortune.” – Peter Bernstein
Stock markets reward growth and there is no debating that. The single biggest catalyst for PE rerating is growth in revenues and profitability. Growth companies command very high PE multiples. What’s equally true is that whatever has happened in the past is already discounted in the stock price. What’s important for future rerating is future growth and the future is difficult to predict.
In our experience of investing, I have realized that most sectors are cyclical in nature. (Beware of times when people call sectors as secular growth stories, those are the times when cyclical industries are at peak and the picture is rosy)!
At the top of the cycle, new participants are lured by the extraordinary return ratios that the industry is generating, leading to excess capacity creation and subsequent decline in profitability. At the bottom of the cycle, the weaker players are unable to sustain their businesses, leading to a reduction in capacities and subsequent demand-supply mismatch and higher profits. This boom to bust cycle takes anywhere from 10-15 years and is usually longer than an average market participant’s memory.
PE rerating is very important for multibagger returns (after all earnings can grow only so much!) and growth is the most important catalyst for PE rerating. We try to identify companies across industries that have the potential to grow above the economic as well as industry growth rate going forward.
Contrarian
“The most contrarian thing of all is not to oppose the crowd but to think for yourself.” — Peter Thiel
A contrarian approach does not mean doing the opposite of others, it means doing things differently from others. Buying in popular names will not give multibagger returns as the stock is already discovered and most likely be trading at higher valuations. We don’t shy away from investing in the companies which operate in industries that are not popular among the institutions. Rather, we love investing in companies that have low or no institution holding as over time with the improved performance of the company, many institutions get convinced to buy leading to higher multiple valuations in the future.
We avoid fad/hot sectors, IPOs and other secondary offerings which are popular amongst institutions as they are known to give quick returns, however, may not give good returns in the long term. (At Aequitas we follow the mantra, do as the promoters do!) More than 40% of our stocks have been multibaggers since inception. We bagged our first 100-bagger in our first 5 years and are on our way to adding more to the list with our astounding track record with ~31% CAGR since 2013, 1020% absolute returns since inception, and $250 mn AUM.
Conclusion
The BSE Sensex (since its inception in 1979) over the past 40-odd years has been a 600-bagger. So finding multibaggers isn’t as difficult as it sounds. A sensible investing approach centered around investing in high-quality, out-of-favor companies at a significant discount to intrinsic value is bound to deliver multibagger returns in the stock markets.
Multibaggers tend to be industry leaders with a strong sustainable competitive advantage. Usually undervalued, such stocks have strong fundamentals, making them attractive investment options.
To understand more about this topic or for more interesting discussions, drop us an email at info@aequitasindia.in