MoneyTalks: How and where to spot multibaggers, and a couple of fundie’s recommendations
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As the name suggests, multibaggers are stocks that can generate multiple bags of money over a period of time.
These are stocks which have the potential to generate explosive growth and produce returns several times the buying price.
Spotting a potential multibagger stock is obviously quite tricky, and it could even take several years before the share price multiplies.
And whilst they are mostly found amongst small caps, multibaggers can also be found in medium and large caps.
On the ASX, these are the top 10 multibagger stocks over the past year.
John So, co-founder of a long-short fund at VP Capital, said that in order to find a stock that could deliver over 5x your money, you really need to find one which has the ability to grow revenue exponentially.
He adds that these types of opportunities aren’t usually found in stable businesses where scale has been more or less consistent over the medium to long term.
“Instead, you want to be looking at companies and sectors that have been growing very quickly,” So told Stockhead.
He gave the example of Afterpay, now Block Inc (ASX:SQ2), which grew to around $40 billion in transactions after starting with just $100m per year.
“So the question is really, how do you identify scalability?” he said.
According to So, what scalable companies have in common is that there’s usually an inflection point, where they go from losing a lot of money, to not losing a lot of money, then to breaking even.
“And where it starts to get exciting is when that growth continues, a large percentage of every additional dollar earned goes to your net profit line.
“When you hit that point of inflection where you suddenly turn profitable, I think that’s when the stock can potentially take off even faster. “
Another way to identify a potential multibagger, says So, is to look at what type of products/service the company provides, and whether they address a large market, or even better, one that no one has touched.
The pharmaceutical sector is one that falls into this category.
“In the process of developing a pharmaceutical drug, the market cap of the biotech is probably disproportionately low compared to what the potential market could be if the drug was successful in their clinical trials,” So said.
These trials could be a long drawn-out process but we’ve seen it happen with companies like cancer imaging company, Telix (ASX:TLX), which has gone up 16x over the last five years.
Another industry that’s very similar to biotech in term of risk and potential is mining.
So gave the example of Liontown Resources (ASX:LTR), which has surged 90x in value over the last five years.
“If a company has got a big mining deposit and a good supply demand dynamics like lithium, everyone knows what the upside is, but there’s a lot of risk to getting to that upside.
“So I think the first thing is again identifying scalability, and assessing the mismatch between its valuation today and how big the market that it’s tapping into can be in the future.”
Accrording to So, Cettire is interesting, and it has transformed itself from around $100 million market cap to $1.15bn today.
Cettire is global online fashion retailer, offering a large selection of personal luxury goods via its website, cettire.com.
It has an extensive catalogue of more than 2,500 luxury brands and more than 400,000 products around clothing, shoes, bags, and accessories.
“What’s really interesting about Cettire is its ability to consistently deliver growth, and the fact that it only has a very small market share in Australia and US of under 1%.
“So all the company needs to do is continue to deliver on that growth to increase market share,” said So.
According to So, if Cettire is able to grow market share, around 20 to 30% of that extra revenue will be converted directly to bottom line earnings.
“And what would happen is that its current earnings would basically go up four or five times, and suddenly CTT would be looking very cheap.”
Azure used to be South American-focused lithium player, but it has since moved on and become a lithium explorer in Western Australia.
“What’s exciting about Azure is that at a market cap of around $700 million, it’s got the potential to host a resource deposit the size of something like Liontown,” said So.
Based on the drilling they’ve done and the data received, So believes Azure can initially put out somewhere between a 50 to 100 million tonne resource, which is very substantial in the lithium mining world.
“That’s an initial resource, but as they continue to drill out their deposit, that could get to a much bigger resource size.”
On the downside, So said that Azure could be one of the stocks to be sold off first if commodity prices start to soften.
“Because at that point, the market is not really interested in an upside anymore, and investors just want to get out of the sector.”
VP Capital is an actively-managed investment fund manager based in Melbourne, targeting opportunities across the capital spectrum.
The fund is a long-short fund and has been running for more than five years, returning IRR of 19.4% vs the Ordinaries Index return of 8% for the same period.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.