Four Proven Approaches to Picking Multibagger Stocks

August 2013

Index of Contents
2

Preface
Approach I
Approach II
Approach III

Buying Stocks With Low Price in Relation to Earnings

Buying Stocks With Low Price in Relation to Book Value

Buying Stocks With Low Price in Relation to Liquidating value

Approach IV

7
9
10

Equitymaster Agora Research Private Limited

103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai 400 021
Tel: (022) 6143-4055 | Fax: (022) 2202-8550 | E-mail: [email protected]
Four Proven Approaches to Picking Multibagger Stocks

Page 1 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Preface
Not many in this part of the world would have heard of the famous value investing firm, Tweedy
Browne Company LLC. However, this is not their only claim to fame.
Some years back, the firm conducted an extensive research in the field of equity investing. It
was an attempt to find out a stock picking method or strategy that has given the highest returns
over a long term
who do not believe in the concept of value investing.
The truth is finally out
So here we are. Finding the next market beating portfolio does not need sophisticated analysis
nor does it involve losing sleep over which way interest rates are headed next or attempts at
finding out whether India will run a trade deficit or a surplus in the next fiscal. It is entirely free
of this so called mumbo-jumbo.
Instead, all it requires is finding out which stocks are trading the cheapest relative to their peers
sting. And we
have the report for proof.
As per the report, a portfolio of stocks that are trading at the cheapest valuations when measured
on conventional valuation parameters like price to book value and price to earnings have shown
remarkable consistency in attaining market beating returns for a sufficiently long period of time.
But why look for cheap stocks? Will any good stock not suffice? Certainly not!
Buying stocks should not be different from buying things on sale in a supermarket or waiting for
the car companies to offer special incentives. The time to buy stocks is when they are on sale
i.e., selling cheap, and not when they are priced high because everyone wants to own them.
The objective of this report is to validate this very fact stocks selling cheap tend to give better
returns over a long period as compared to those selling at expensive valuations, all things
remaining same.

Four Proven Approaches to Picking Multibagger Stocks

Page 2 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

As part of the analysis that went into preparing this report, we dug deeper into history and
studied whether the approach of buying cheaply valued stocks has delivered good returns over
the long run.
The year we have used as our base is 2003 as we believe that analysis going as far back as
nearly a decade is a long enough time to prove the validity of our approach.
And what has been the conclusion of our study?
Less valued stocks have performed brilliantly over the long term. Whether one bought stocks
trading at low P/E, or low P/BV, or even low
(we will explain this in a bit),
the returns have been great.

multibagger stocks.
Well, the good news does not end just yet. This exclusive 15 page report, which is otherwise
worth Rs 495, is being presented absolutely free of cost to you.
But just a word of warning here

these lists present just the universe of stocks that pass these

credibility, and future prospects before making the final buying decisions.
We hope this report is of some help to you in your search for some brilliant long-term
investment opportunities.
-being.
Warm regards,
Team Equitymaster

Four Proven Approaches to Picking Multibagger Stocks

Page 3 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Approach I - Buying Stocks With Low Price in Relation to

Earnings
Stocks bought at low price/earnings (P/E) ratios offer higher earnings yields than stocks bought
at higher P/E ratios. The earnings yield is the yield that shareholders would receive if all the
earnings were paid out as a dividend.
Investing in stocks that are priced low in relation to earnings includes investments in companies
nd
expected to grow, is preferable to a similarly priced company whose earnings are not expected
to grow.
1,800

Avg. return for stocks based on P/E

From a universe of 241 of BSE-500
stocks that were listed 10 years back

1,200

600

0
<5

5 to 10

10 to 20

20 to 25

>25

P/E in August 2003

Data Source: ACE Equity
Excludes banking & financial companies. Also excludes Core Education & Tech as it was skewing the data

The fact that buying low P/E stocks can get you better returns than stocks trading at high P/E is
validated by the under-mentioned chart. It shows the average returns of stocks over the past 10
years across different range of P/E multiples.
As the chart shows, stocks in the year 2003 with P/E multiples of less than 5 times, or even
those with multiples of between 5 and 10 times, have generated the biggest returns over the
following ten years.
On the other hand, returns from the Sensex since then till date has been just around 407%,
making it part of the category that has generated the least return as per the above chart.
Four Proven Approaches to Picking Multibagger Stocks

Page 4 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

But even if one had picked up low P/E stocks (P/E of less than 10 times) then, the returns till
date would have been spectacular. As against this, those who picked up stocks with P/E
multiples of between 10 and 25 times have generated considerably lesser returns.
The analysis excludes stocks of banking and financial companies, as P/E is not the right metric
to assess their valuations. Price to book value is, as we will study in the next chapter.

Four Proven Approaches to Picking Multibagger Stocks

Page 5 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Approach II - Buying Stocks With Low Price in Relation

to Book Value
Apart from P/E, another ratio that is commonly used to value stocks is price to book value or
P/BV. This is arrived at by dividing the market price of a share with the respective company's
book value per share. Book value is equal to the shareholder's equity (share capital plus reserves
and surplus). Book value can also be arrived at by subtracting current liabilities and debt from
total assets.
Stocks priced at less than book value are purchased on the assumption that, in time, their market
price will reflect at least their stated book value, i.e., what the company itself has paid for its
own assets. All things remaining constant, such stocks generate higher returns over the long run
as compared to stocks that trade at higher P/BV ratios.

Avg. return for stocks based on P/BV

2,000

From a universe of 303 of BSE-500 stocks

that were listed 10 years back

1,500
1,000
500
0
<1

1 to 1.5

1.5 to 2.0

2.0 to 3.0

>3.0

P/B V in August 2003

Data Source: ACE Equity

See for instance the chart above. Stocks trading at P/BV of less than 1 time have far
outperformed those that traded at a higher valuation (1.5 times and above).
Based on this analysis, it becomes clear that buying a basket of low P/BV stocks may get you
outstanding returns over the long term. But you may do even better if you can determine which
of the low P/BV stocks are worth purchasing and which are about to go bankrupt. Looking for
companies with a good overall track record, and manageable to low debt among stocks trading
at discount to their book value can present great investment opportunities.
Four Proven Approaches to Picking Multibagger Stocks

Page 6 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Approach III - Buying Stocks With Low Price in Relation

to Liquidating Value
The idea here is to buy stocks at a cost less than their net current asset value (NCAV), and
thereby giving no value to the fixed assets. But why just current assets? Because it includes
items like cash and other assets that can be turned into cash within one year, such as accounts
liquidated. This was a stock selection technique successfully employed by Benjamin Graham.
Graham believed that stocks selling below NCAV were worth more dead than alive. He stated if
a stock was selling below liquidating value, either the price is too low or the company should be
companies are in no danger of squandering these assets, and have formerly shown a large
earning power on the market price.
The fact that the NCAV rule works cannot be doubted. But it is difficult to find stocks that sell
at a discount to NCAV in bull markets. It was the case in 2003 as well. While there were several
stocks that were trading at low P/E and P/BV, but not many were trading at discount to their
respective NCAV.
As such, for our analysis, we have studied the premium on NCAV at which stocks from our
universe were trading at then. And the result is that - stocks that were trading at the lowest
premium to the NCAV (less than 5 times NCAV and between 5 to 10 times NCAV) in the year
2003 have returned the most in the subsequent ten years. As compared to this, stocks trading at
multiples of more than 10 times NCAV have turned out relatively poor performance over these
years.

Four Proven Approaches to Picking Multibagger Stocks

Page 7 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Avg. return for stocks based on MC/NCAV

1,600
1,200

From a universe of 155 of BSE-500 stocks that

were listed 10 years back., Excludes bank sector

800
400
0
<5

5 to 10

10 to 15

>15

MC/NCAV (Times) as in FY 2003

MC-Market capitalisation, NCAV Net current asset value;
Data Source: ACE Equity; Excludes banking & financial companies.

Four Proven Approaches to Picking Multibagger Stocks

Page 8 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

Approach IV Magic Multiple

If you are confused which of the first two ratios - P/E or P/BV - to use to determine whether a
stock is trading cheap, Benjamin Graham

Graham has put an upper limit to the output of this ratio - 22.5. This he derived using a
maximum P/E of 15 times, and maximum P/BV of 1.5 times - the highest multiples he was
ready to pay for stocks.
Our analysis shows that, on applying this multiple to our universe, stocks where the output of
P/E multiplied by P/BV was lower then 22.5, have generated more returns than those whose
output was greater than 22.5.

Avg. return for stocks based on Graham's mul%ple

1,400

From a universe of 238 of BSE-500 stocks

that were listed 10 years back

1,100

800

500
<10

10 to 22.5

>22.5

Graham's mu%lple as in August 2003

Data Source: ACE Equity
Excludes banking & financial companies.

Four Proven Approaches to Picking Multibagger Stocks

Page 9 of 15

The Most Profitable Approach to Stock Picking

August 2013

After reading the above approaches to picking up cheap stocks, you must be wondering whether
this can work in all environments. Quite certainly, we believe. Irrespective of the environment
there will always be some stocks that would be trading cheap vis--vis their peers and also
stocks that are expensive.
Thus, even now, you can still find cheap stocks using all these three approaches. We will make
your task easier by producing three lists of stocks using all these methods.
But we must warn you that all these lists present just the universe of stocks that pass these
credibility, and future prospects before making the final buying decisions.
In short, it is important to do a proper homework before jumping on to opportunities that present

These valuations criteria can just be considered as one of the important stepping-stones in your
search for multi-bagger stocks.
But these are stones you would not want to trip over!
So read the next three pages very carefully. You never know your next multi-bagger(s) could be
out of these.

Disclaimer: Stocks listed in the following three tables are just representative of the ideas
and must not be treated as recommendations from Equitymaster

Four Proven Approaches to Picking Multibagger Stocks

Page 10 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

I. Stocks With Low Price in Relation to Earnings

Company Name
Vikas WSP Ltd.
Alok Industries Ltd.
Core Education & Technologies Ltd.
Shree Ganesh Jewellery House (I) Ltd.
Opto Circuits (India) Ltd.
Prakash Industries Ltd.
Gitanjali Gems Ltd.
Rolta India Ltd.
Monnet Ispat & Energy Ltd.
Uflex Ltd.
SRF Ltd.
Sintex Industries Ltd.
BGR Energy Systems Ltd.
Tata Steel Ltd.
Gujarat Narmada Valley Fertilizers & Chemicals
Gujarat State Fertilizers & Chemicals Ltd.
Patel Engineering Ltd.
Chambal Fertilisers & Chemicals Ltd.
Jaypee Infratech Ltd.
Reliance Infrastructure Ltd.
Onmobile Global Ltd.
Rei Agro Ltd.
Peninsula Land Ltd.
PC Jeweller Ltd.
Gujarat Mineral Devp. Corpn. Ltd.
JK Lakshmi Cement Ltd.
Deepak Fertilisers & Petrochemicals Corpn. Ltd.
Bayer CropScience Ltd.
Amtek Auto Ltd.
Gujarat Alkalies & Chemicals Ltd.

P/E
0.59
1.14
1.67
1.72
2.40
2.46
2.54
2.63
2.65
2.68
2.74
2.98
3.74
4.14
4.18
4.20
4.26
4.28
4.33
4.39
4.50
4.63
4.74
4.83
5.05
5.06
5.09
5.10
5.17
5.17

Excludes banking & financial companies.

Four Proven Approaches to Picking Multibagger Stocks

Page 11 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

II. Stocks With Low Price in Relation to Book Value

Company Name
United Breweries (Holdings) Ltd.
Housing Development & Infrastructure Ltd.
Patel Engineering Ltd.
Vikas WSP Ltd.
Educomp Solutions Ltd.
IVRCL Ltd.
Aanjaneya Lifecare Ltd.
Alok Industries Ltd.
Core Education & Technologies Ltd.
GTL Infrastructure Ltd.
Prakash Industries Ltd.
Shipping Corpn. Of India Ltd.
Bajaj Hindusthan Ltd.
Welspun Corp Ltd.
Punj Lloyd Ltd.
Standard Chartered PLC
Titagarh Wagons Ltd.
Gitanjali Gems Ltd.
NCC Ltd.
Orient Paper & Inds. Ltd.
Uflex Ltd.
Shree Ganesh Jewellery House (I) Ltd.
Monnet Ispat & Energy Ltd.
Onmobile Global Ltd.
Hindustan Oil Exploration Company Ltd.
Indian Overseas Bank
Orchid Chemicals & Pharmaceuticals Ltd.
BEML Ltd.
Indiabulls Power Ltd.
Sintex Industries Ltd.

Four Proven Approaches to Picking Multibagger Stocks

P/BV
0.11
0.14
0.14
0.15
0.15
0.17
0.17
0.18
0.18
0.20
0.21
0.21
0.21
0.21
0.22
0.23
0.24
0.24
0.25
0.25
0.25
0.26
0.26
0.27
0.27
0.29
0.29
0.29
0.29
0.29

Page 12 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

III. Stocks With Low Price in Relation to Liquidating Value

Company Name
Videocon Industries Ltd.
Indian Infotech & Software Ltd.
Housing Development & Infrastructure Ltd.
Shree Ganesh Jewellery House (I) Ltd.
Rei Agro Ltd.
HCL Infosystems Ltd.
Punj Lloyd Ltd.
Patel Engineering Ltd.
Hindustan Construction Company Ltd.
Unitech Ltd.
JB Chemicals & Pharmaceuticals Ltd.
Goenka Diamond & Jewels Ltd.
Vardhman Textiles Ltd.
Oil India Ltd.
Alok Industries Ltd.
Parsvnath Developers Ltd.
PTC India Ltd.
BEML Ltd.
Gujarat State Fertilizers & Chemicals Ltd.
Graphite India Ltd.
Welspun Corp Ltd.
Shree Renuka Sugars Ltd.
Puravankara Projects Ltd.
Deepak Fertilisers & Petrochemicals Corpn. Ltd.
State Trading Corpn. Of India Ltd.
Gitanjali Gems Ltd.
Mahindra Lifespace Developers Ltd.
Bombay Dyeing & Manufacturing Co Ltd.
Anant Raj Ltd.
Omaxe Ltd.

MC/NCAV
0.29
0.36
0.37
0.47
0.59
0.68
0.76
0.77
0.79
0.83
0.90
0.94
0.95
0.99
1.03
1.22
1.29
1.32
1.41
1.42
1.46
1.48
1.51
1.53
1.53
1.61
1.66
1.67
1.69
1.80

MC - Market capitalisation, NCAV - Net Current Asset Value;

Excludes banking & financial companies.

Four Proven Approaches to Picking Multibagger Stocks

Page 13 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

IV. Stocks With

Company Name
Vikas WSP Ltd.
Alok Industries Ltd.
Core Education & Technologies Ltd.
Shree Ganesh Jewellery House (I) Ltd.
Prakash Industries Ltd.
Gitanjali Gems Ltd.
Patel Engineering Ltd.
Uflex Ltd.
Monnet Ispat & Energy Ltd.
Rolta India Ltd.
Sintex Industries Ltd.
Opto Circuits (India) Ltd.
SRF Ltd.
Onmobile Global Ltd.
Housing Development & Infrastructure Ltd.
Titagarh Wagons Ltd.
Tata Steel Ltd.
Amtek Auto Ltd.
Jaypee Infratech Ltd.
Rei Agro Ltd.
Gujarat Narmada Valley Fertilizers & Chemicals
Jindal Saw Ltd.
BGR Energy Systems Ltd.
Reliance Infrastructure Ltd.
NCC Ltd.
Gujarat State Fertilizers & Chemicals Ltd.
Peninsula Land Ltd.
Deepak Fertilisers & Petrochemicals Corpn. Ltd.
JK Lakshmi Cement Ltd.
Dishman Pharmaceuticals & Chemicals Ltd.

Graham multiple
0.09
0.21
0.30
0.44
0.51
0.61
0.61
0.67
0.68
0.87
0.87
0.95
1.04
1.21
1.31
1.51
1.57
1.59
1.70
1.75
1.76
1.88
1.88
2.00
2.32
2.32
2.55
2.89
2.92
2.97

Note: Data as on July 31, 2013; Click on the company name to get more information on the stock;
Excludes banking & financial companies.
Source (for all tables): ACE Equity

Four Proven Approaches to Picking Multibagger Stocks

Page 14 of 15

Four Proven Approaches to Picking Multibagger Stocks

August 2013

About Equitymaster
Equitymaster, India's leading independent equity research initiative, is the
preferred destination of the thinking, long-term investor. Our research
coverage extends to over 700 companies and 23 sectors. We provide indepth analysis on the stocks and sectors under coverage. We also offer
live stock market commentary and free newsletters.
Do post your feedback on this guide to us at [email protected]. Or
on our Facebook Page!
To know more about us, please visit www.equitymaster.com or
call +91 22 6143 4055.

Share these fantastic market beating ideas with your friends and colleagues:

Disclaimer
Equitymaster Agora Research Private Ltd (Equitymaster) is the owner of the copyright in this Report. The readers are requested to
note that this Report is only meant for personal use of the Subscribers of Equitymaster. Any act of copying, reproducing or
distributing this Report whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited
and shall be deemed to be copyright infringement.
This Report is for information purposes and is not providing any professional/investment advice through it and Equitymaster
disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this Report, including without
limitation the implied warranties of merchantability and itness for a particular purpose
. Information contained in this Report is
believed to be reliable but Equitymaster does not warrant its completeness or accuracy. Equitymaster will not be responsible for
any loss or liability incurred by the user as a consequence of his taking any investment decisions based on the contents of this
based on his speci ic
investment objective and inancial position and using such independent advisors as he believes necessary
.
Please refer our Terms of Use.
Four Proven Approaches to Picking Multibagger Stocks

Page 15 of 15