Basant Maheshwari’s Strategy for Identifying Multibagger Stocks

What are multibagger stocks and why should I care? Well, you may choose to not care at your own peril. Multi-bagger stocks are those stocks which move up fast and furious, and make you super-rich before you can even know what’s happening. Multibagger stocks are game changers – they can change your life. I have been fortunate to have invested in one multi-bagger stock and watched with awe as one fine day, after months of stagnation, it started skyrocketing and in 3 months it moved up 4 times.

But that is nothing compared to what Investment Gurus like Basant Maheshwari, Ramdeo Agarwal, Sanjoy Bhattacharrya, Saurabh Mukherjea and others have done. These are people who have minted money by investing in not one but a bunch of multi-baggers. And their mult-baggers have gone up 30x, 40x, 100x or even 1000x.

Take Basant Maheshwari for example. He bought Pantaloon Retails for Rs 7 and sold it for Rs 280, a humongous 40-bagger!! He has also had numerous other super-hits, and in this article we will, as eager and devoted students, in the upanishad style, try to make sense of his sutras (statements).

1. Identify a Trend

Basant Maheshwari has often repeated that he likes to play a trend. Every 5-7 years there is a new trend where tonnes of money can be made by the savvy investors. Basantji is one of those specialist trend spotters, who are early to the party and cash out as soon as they see the trend breaking.

He says: “When a new trend is unfolding, stocks belonging to the sector regularly make new highs. So anything that is at a 52 week high attracts my attention.” (1)

This is quite the opposite of an average investor who would prefer to invest near 52 week lows!

He goes on to say: ” Let’s look at 2-3 trends from the past – the software trend of the late 1990s and then the infra trend of 2000s. Of late, we have this consumer discretionary trend from 2009. Now look at these things – new highs for all the stocks enjoying a trend.” (3)

Characteristics of a trend in a sector: (3)

  1. Most of the companies in that sector will hit all time highs.
  2. Most of these companies will show above average growth.
  3. For a trend to be sustainable, the scale of opportunity must be huge.
  4. New trends will generally have first generation promoters.
  5. Before a trend breaks, stocks normally move up 50-100%.

2. Sectors to Avoid

Some sectors are strictly no-no for Basant. They are:

  1. regulated sectors
  2. sector with government intervention
  3. cyclical sectors
  4. where growth is not predictable

He gives an example of ITC where regulations have hampered a good business. He says: “ITC was predictable in sense of its business but it wasn’t predictable with what the government would do. The regulations ensured that ITC remained a predictable company from business point of view but the regulations were always uneven. From single cigarettes and packets and things like that – over a period of time we have seen that once the government gets after anything it is very difficult to make money out of it.” (6)

3. Good cashflow and secular earnings growth

On this front Basant Maheshwari is very categorical. Identifying companies with good cashflows and secular earnings growth is the very first starting point. Avoiding cyclical stock is another major to do.

He says: “What are the stocks that have made the most money in 20 years? Asian Paints, Nestle, Infosys, Marico, Dabur, Eicher Motors, Bajaj Auto” (1)

Regarding growth he says: “Nobody is interested in buying a company that is growing at 18%. Many are interested if it grows at 25%. Plenty will be interested if it grows at 35%. And everybody will be interested if it grows at above 50%. So, the percentage change in growth is only 10-15%, but the amount of incremental investors it can draw in is huge.” (3)

He explains the market’s love for growth and clarifies this point further: “Market loves growth, in, it is intoxicated by growth. So, the sectors where you can see predictability, surety and certainty, are being bid up several times ahead and after two-three years of slack earnings, the base effect becomes very favourable … there is so much money chasing stocks that even if you get 20-25-30 per cent consistent growth, there is enough money in the world to bid stock prices up, especially the ones which have certainty and surety.” (5)

4. Choose sector leaders

Basant Maheshwari looks out for sector leaders whch usually have strong cash flows and high return on equity. He says: “Don’t buy the poorer cousins in a sector. If you bought Infosys in the nineties you are wealthy. But if you bought Silverline or DSQ Software, you lost everything.” (1)

Basant always chooses the leader in a sector even when its valuation may appear to be much higher than its peers. Earlier during each trend, he has managed to pick and choose sector leaders (4):

  • Consumption boom – Page Industries and Hawkins Cookers
  • Housing Finance Trend – Repco Home Finance

5. Long holding periods

Basant Maheshwari recommends holding good stocks for long periods and asks us not to be in a hurry to book profits. That is indeed a tough call, as most amateur investors like us, rush to book profits when we see a 30% or 40% upswing. The irony is that on the one hand we look for multi-baggers, while on the other had we sell a stock for 30% upside and dont wait to check if it becomes a multibagger!

He says: “If a stock you bought for Rs 100 goes to Rs 150, you rush to sell it. If it goes to Rs 60, you hold on and wait for it to come back to Rs 100. That’s how you lose money. If you buy property and its value goes up, you don’t sell the kitchen and say the bedroom is now free! Why are we so insecure about making money in stocks?” (1)

However, he also cautions that one should sell when things are not going as per the plan anymore. He says: “you’ve got to love your family and not your stocks. I love the stock only till the point the stock loves me – in doing what I wanted to do. If I find that my stock is not rising at the rate I wanted it to rise, or is facing headwinds, then this is not a place I got to give it a lot of time. Because if you relax a little bit with a stock that is not acting in your favour, then you might lose a lot of money as well.” (2)

He further adds that stock prices have to move favorably during the holding period, otherwise an investor, however patient he is, will get disheartened. He explains: “I cannot say I can look at a stock which does not go up for three years because stock price moving up gives you confidence. I mean how can you say that I am long-term investor and it does not matter to me if a stock does not move for three years. I am not in that camp. So I would like the stock price to move up with earnings. With earnings if the stock price moves up, then we put in more, so the initial space is there so I think that is how it goes.” (5)

I am presenting here one of the checklists used by Basantji which he has kindly shared with his fans and followers in a Safal Niveshak interview.

Checklist used by Basant Maheshwari to pick Multibaggers

  1. Is it cyclical or non-cyclical?
  2. If non-cyclical, he checks 4 year revenue growth.
  3. Has 4-year revenues doubled?
  4. If yes, he next looks at Return on Equity (ROE).
  5. Is ROE >= 25%?
  6. If yes, then check the dividend yield.
  7. Check EBIDTA Margin

He says: “if the revenue has doubled in four years, and if the profits have quadrupled, and if the EBITDA margin is sitting at 30%, I’ll say that margins can’t expand from here on. So if the EBITDA margin is at 30% and the revenue is not growing at more than 18%, there there’s some risk involved. Then I will look at similar businesses across. I will also look at the management – how much dividend it pays, and does it pay taxes or not. Then I will ask whether the industry is growing or not.” (2)

Conclusion

The good things for us amateur investors is that investment gurus like Basant Maheshwari generally reveal all their investment strategies and sometimes even specific companies. Everything is right there in front of us waiting to be seized – yet we lack the discipline, conviction and tenacity, to do what these super-investors do. However, I am quite positive, that with this comprehensive investing framework that I have shared above, as gleaned from various Basant Maheswari interviews and discussions, we should be in a good position to strike it big by identifying trends, identifying potential mega-stocks and sticking to them till they become multibaggers.

References

  1. Finding Multi-baggers the Basant Maheshwari Way
  2. Interview with Basant Maheshwari – Part 3
  3. Interview with Basant Maheshwari – Part 2
  4. Basant Maheshwari Announces Discovery Of New Mega-Bagger Sector & Stocks
  5. Market intoxicated by growth and super bullish on pockets of certainty: Basant Maheshwari
  6. Look at established players than midcaps: Basant Maheshwari

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A Few Last Words

Before making any investment decision, please contact your financial adviser.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. I do not offer any opinion concerning securities or public offers. Whatever analysis I provide is through public media only on Mkerj. I am not covered under RA Regulations.

I have provided this article for educational purpose only.

I hope you found this article on Basant Maheshwari’s Strategy for Identifying Multibagger Stocks useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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