The term “Multi-Bagger” was coined by Peter Lynch in his book ‘One up on Wall Street’ which refers to stocks that return many times over the original investment, more than 100%.
Multi-bagger stocks are undervalued and have strong financial fundamentals, thus presenting a great investment opportunity. Multi-bagger stocks also have a scalable business model and have an advantage over their direct competition.
You can find these opportunities in industries like software, technology, and biotechnology. What you are looking for is a company that is changing the lay of the land causes waves, not ripples. A hot new tech product or software company will start as a micro-cap under a $100MM market cap and provides a perfect nesting ground for a potential multi-bagger.
How do you Identify a Multi Bagger?
Within the last 50 years, all multi-baggers have one thing in common and that’s growth. Companies with growth in revenues and expanding valuation multiples. Multi-baggers will not come from companies that are diversified and stagnate in revenue.
Below you can see a rudimentary chart of a multi-bagger. There are three important stages to understand; first is the institutional buyer’s stage, second is the waiting game, and third is a success!
Some fun investor jargon is when a stock that doubles its price is called a two-bagger while if the price grows 10x, it would be called a 10-bagger.
Before getting into a possible multi-bagger you need to have a thesis. A thesis is your reason for investing in the company. You should never make an investment without a thesis. Buying into stocks blindly without research into company platforms, company financials, and their product development is setting you up for failure.
Cassava Sciences is a biotechnology company that recently went from $3 to $123!! We will be looking into this chart path and analyzing the three stages of a multi-bagger.
A thesis for Cassava probably went something like this…
Cassava is a well-funded biotechnology company, which is positioned well for FDA approval of its Alzheimers treatment. Cassava’s preliminary data is showing good signs of success and they are moving further in their trials. Their market cap is low and poised for a significant increase if the data continues to show benefits for the patients.
The 3 Chart Stages
Below I have marked up a chart of a Cassava. Now obviously you had to time this perfectly to max the maximum and I highly doubt anyone who traded the stock did. Managing your emotions throughout this process has proven to be extremely tough. Mentally if you got in at $3 and the stock travels up to $43 after 6 months you are looking at a 1,433% gain in your investment. WOW! But do you sell? Do you trim some? How do you handle this mentally?
Let’s go over the three stages and expand on these questions.
These days are huge for the stock and an important message for investors. Seeing institutions buying in can be relieving because it backs your original thesis of the company. The institution could have been following the stock from $3 and needed to see progress within the company to make an investment.
Institutions can be like J.P. Morgan and Goldman Sachs. Or smaller private funds that specialize in the given industry.
Clearly, something significant was released in February of 2021 to see a price movement from $8 to $43. Strong data was mostly released for Cassava and institutions became very interested in Cassava’s future. You will rarely see institutions get in around the $3 mark in this case. Remember they are entering positions with millions of dollars so missing that $3 to $8 gain when the stock goes over $100 isn’t a big deal to them. They will make millions entering at $8 anyway.
The Waiting Game
This is the most difficult part. Here you have to rely on your thesis strongly. The more research and confidence you have in your thesis the better off you are in the waiting game. You also have to be careful not to get attached to the stock. Fall in love with the possibility of you making amazing gains that you are blinded when your thesis starts slipping.
This period can last 3, 6, maybe even 12 months. And holding onto your 1,400% profit could be really hard. Hopefully in your thesis, you had already planned for this event. Maybe you decided you want to sell 25% of your position at this new price of $43. Or do you want to continue to hold till the next report is published by the company?
Either way, to make this portion of the multi-bagger chart path less stressful, you will have to be confident in your research and thesis. If your thesis still holds true and the company is moving forward. Do not sell. Once that thesis is comprised, get out and don’t think twice about it.
Haha! You made it! Congrats on your multi-bagger trade this is a huge achievement. Enjoy it and remember to write down all your experiences, what worked, and what didn’t. Also, do not try to time the peak perfectly. When you see your thesis play itself out and hit all your milestones it is time to get out of the position and enjoy those profits, you deserve it.
Categories: Financial Advice