Multibaggers can give manifold returns to its investors. These critical phases in the lifecycle of multibagger stocks are quite helpful.
Every stock moves through different phases of its lifecycle to achieve fair stock valuation. This concept holds true even when analyzing multibagger stocks.
Multibagger stocks are the stocks of an unknown company whose growth potential is yet to be discovered by investors. In its initial phase, the stock is mostly unknown among big investors or traders. It is perhaps due to minimum to no media coverage as well as different types of business struggles.
But, once the company’s growth potential is discovered the stock shows sudden spike in its share price to become multibagger for investors. This complete lifecycle of a multibagger often contains various ups & downs before its reaches its full potential.
However, no one knows the exact time period spent by stock in each phase before it proceeds for the next phase. But, a long term approach can help investors to adapt an ongoing transformation quite easily. Here are 4 key characteristics of different stages of multibagger lifecycle:
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(1) Consolidation Phase In The Lifecycle Of Multibaggers
It is one of the most significant phases in the lifecycle of multibagger stocks. In this phase, most of the potential multibaggers experience an improvement in the fundamentals. But, the market doesn’t recognize these improvements for a long time.
This initial phase is often seen as the earlier life of a new company. It may also come after a prolonged decline in the stock price due to adverse business conditions.
It may last from few months to many years. In this stage, the stock is mostly held by promoters or founders of the company.
Some of the key characteristics of first phase of multibagger lifecycle are:
(a) Low Liquidity In The Script
Potential multibaggers experience a low liquidity in this phase. It is also marked by low average trading volume due to absence of big & active traders from the script.
(b) Less Number Of Institutional Shareholders
Big & active investors along with large institutions & mutual funds stay away from such stocks. It is mainly due to low market capitalization of company & low liquidity levels.
(c) Cheaper Stock Valuation
These types of promising stocks are likely to trade at low price to earning ratio, low price to book ratio & low market capitalization. Therefore, the stock is said to be a mispriced opportunity for investors.
(d) Lack Of Media Coverage
Since the company is small enough, it lacks coverage from media houses, stock analysts as well as other market participants.
(e) Stock Moves Within A Range
The stock keeps trading within a tight trading range in spite of fundamental developments in the company. It is usually the consolidation stage of a potential multibagger. A strong resistance develops at the top of the base area.
Any breakout above the base area signals the entry into next phase of stock. Sometimes, the stock may experience one or two sharp corrections to shake weak shareholders.
This initial phase dictates the best time for investors to buy potential multibaggers for long term. Investors can buy such stocks at any point to generate higher returns irrespective to time.
However, it is always difficult to recognize the stock in this phase. It is mainly due to the less availability of information needed to analyze a company’s growth potential. Additionally, investors need to have huge patience to stay invested in these hidden gems.
- Multibagger Lifecycle: Google Books