Looking for multi-baggers in the stock market? But among more than 5,000 companies listed on BSE, picking the best ones is more difficult than you’d imagine. Read this post to know how you can be a stock-picking master.
Returns of more than 10 times or 20 times are not uncommon in the Indian stock market. There are hundreds of companies that have delivered stunning returns over the years. Known as multi-baggers, these winning stocks are what every investor searches for to generate handsome returns.
However, there are more than 5,000 companies currently listed on BSE. Finding multi-baggers amid this crowd is more difficult than you’d imagine. If you are struggling to find winning stocks, here are a few tips that can help-
1. Understanding the Services or Products Offered by the Company
Would you ever consider buying a smartphone without first understanding its features? Similarly, to pick winning stocks, you first need to understand what a company offers before purchasing its shares. Try to understand the company, its products or services and you are sure to make a better decision.
No matter how promising a company looks, avoid investing in it if you do not understand their business or business model.
2. Will the Company Stay Relevant in Future?
The mobile phone you purchase should have the latest technologies and features to stay relevant in the future too. In the same way, would people consider buying the product or service of the company you’d like to invest in 10-15 years down the line?
If the answer is yes, then it can be a good option. If you think otherwise, look for another company.
3. Don’t Trust the P/E Ratio Blindly
Once you’ve shortlisted a few companies based on the factors discussed above, it’s time to move to their financials. Modern traders and investors are tech-savvy and love digging into the financials of companies they’d like to invest in.
One of the most important things they take into consideration is the P/E ratio of a company. This ratio is a correlation between the current price of the stock and its per-share earnings. However, financials can be manipulated and might also include special charges and/or write-downs. While there is no denying the P/E ratio is helpful, avoid investing blindly solely on the basis of this ratio.
4. Consider Price to Cash Flow
Unlike the earnings, the cash flow of the company cannot really be manipulated, making price to cash flow a significant consideration. Even if you prefer investing in companies that regularly offer dividends, the cash flow will help determine whether or not a company will continue paying dividends in the future.
Even for companies that are aiming for buybacks or acquisitions, cash flow is a crucial determinant. It is better to first focus on the cash flow and then on the earnings.
5. Technical Indicators
After getting a fair idea about the financials of the companies, go through the technical indicators. While technical indicators is a vast topic which can require at least a few months to understand, try to know at least the basics.
This would include understanding graphs, trend line, moving average, and historical volume. Most of the savvy investors looking to pick winning stocks on Sensex first analyse the company, its products and services, followed by their financials, and then the technical indicators for confirming their pick.
While a lot more goes into picking multi-baggers, the basics discussed above are sure to give you an edge over other new investors. Practice this stock-picking method religiously, and you might end up picking a stock that would give you incredible returns.