I have a query in my mind that is bugging me since long time. I am not sure its important at all. During all these years i have a feeling stock in 2 digits has better chances to become multibagger compared to 3 digits or 4 digits. assuming all other variables same. that means growth, management quality, market cap etc
Example 1
Stock A. Price 60. Market Cap 200 cr
Stock B. Price 600. Market Cap 200 cr
Stock C. Price 2000. Market Cap 200 cr
Among these 3, my prefernce is always A. I have a feeling with small price it attracts small inventors and also several investors. In this example A will have higher number of shares resulting in better liquidity and more volumes, so it goes up faster. apart from psychological favour towards the assumption small price means ‘cheap’ stock
Example 2
Stock A. Price 60. Market Cap 20000 cr
Stock B. Price 600. Market Cap 800 cr
Stock C. Price 2000. Market Cap 200 cr
in this case the market cap is different. my understanding is very large market cap will hamper growth at some point (assuming the sector itself is now growing at same rate). so what would be a good ballpark number for market cap to identify multibaggers. In this example Stock C will have better chances ?
so in general, do the stock price and market cap have a bearing on the stock becoming multibagger (all other things being equal) ? if so what would be ideal figures ?
dont get anchored by price of stock. it has got nothing to it being multibagger.
More important in that aspect is the market cap in comparision to the opportunity size available.
There are some sectors where market cap usually dont matter bcos opportunity size is huge. e.g finance, banks, pharma, consumers, fmcg etc. Here also a company starting with a small market cap might have an advantage bcos the opportunity size is huge but important thing is
1). management
2). balance sheet
3.competitive advantages -or moats/presence of niches
Hitesh has given all the pointers for you. As Hitesh mentions, price anchoring is a common behavioural trap/problem.
To my mind, even more prevalent than price anchoring is the other behavioural problem - the PE illusion. For same level of growth say 15%, Low PE =cheap, High PE=costly
He says that this is such a cognitive illusion for us investors, (everyone falls prey to it including Institutional analysts) he is still not sure he has overcome it!
One should not look at the stock price alone. Earnings and P/E ratio should also be taken into account. If there is no earnings visibility, then one will never get a multibagger whatever the price. Ultimately it all boils down to earnings over a period of time. If the stock price strays away from the earnings, sooner or later it will catch up with the earnings.
Another point to remember is that do not chase stocks with high P/E ratios. An extremely high P/E ratio is a handicap to a stock just like extra weight in the saddle is a handicap to a race horse says Peter Lynch.
When one says a stock has a high P/E ratio of say 50, it means that it will take 50 years to recover your investments if the company maintains its earnings at the same level year after year for 50 years. Is this possible in real life? It is anybody’s guess.
One more point which I feel a strong negative is the companies who go for split/bonus just to increase the liquidity and hence increase in trading activities.
They are in general not the one who create long term value.
I beg to disagree with you here. Bonus/split have no effect in fundamental of the company, hence are a non-issue, or positively effective for investors. Here is how
1). Thanks to a weird Indian law, bonus can help you pay less short term capital gain tax.
2). Illiquidity is an often ignored source of risk, Increased liquidity is a good thing for an investor as it reduces the illiquidity premium, and hence make the stock more attractive.
thanks guys for the replies. the origin of my illusion is almost all the stocks that are unearthed from this forum and ted are recommended when their stock price is less than 200
I agree with hitesh. But, I do struggle with the price issue. Lets say I have a fixed amount - 1L - and I have to choose between 2 companies e.g. Page and Cera. Now 1L gets me ~31 shares in Page while it gets me 250 shares of Cera.
I can do the math and see that the price really does not matter - if the price doubles, my initial investment doubles either way. I’m not thinking of dividends here.
But somehow, being able to buy less no. of shares of Page for 1L makes me feel ‘poorer’ and sends me towards Cera. Anybody else feel like this
Why a long term investor have to even think of short term capital gains?
2).
Since I manage my own money, I need not worry about selling it off to pay the fund owners, as in case of MFs. So even if the stock falls 50%, I can live with it.
When I pick a company I would like them to be illiquid which is a clear indication that this stock is not on institutional radar yet.
For example for me Page is a better option for me while Titan is ok, even though both of them are great businesses.
One more point which I feel a strong negative is the companies who go for split/bonus just to increase the liquidity and hence increase in trading activities.
They are in general not the one who create long term value.
Hi Subhash,
You have every right to differ with me, as views and investing styles are different.
Also look at the data below:
You can look at the links above and see how many of them have been performing well or what was the reason for most of them to issue bonus shares or go for a split.
I dont have that kind of feeling, since after dmat is introduced we hardly pay attention to lot size. however i have a different strange feeling. stock A at 50 rs can become 500 rs faster than stock B at 3000 becoming 30000 rs. all other parameters being equal. anyway i am yet to see a stock quoting at 30000 rs, at some point they need to dilute the equity.
donald,
thats an excellent video on PE illusion. very good explanation by rajiv. i am more interested in such simple videos that much ‘accounting’ jugglary. also i signed up for workshop on value investing by safal niveshak in hyderabad this weekend. anybody has any review ?
i always feel listening to a class room type structured teaching is much much better than hundreds of hours of reading. only reading we should be doing is the books by the gurus like buffet, lynch etc. other stuff, better watch video or audio than reading
