Stalking the 100-bagger


Director, Banyan Tree Advisors

December 20, 2011

A stock that grows 100 times after you buy it? Now, that’s a real winner.

ONE OF the terms commonly used by regular stock market players is the 100-bagger. Which means that the stock price goes up a 100 times after you’ve bought it. To land a 100-bagger is the dream of every investor (and my name tops that list!), and if you do land one, you won’t have to worry about your money matters for a long time. Imagine investing Rs 1 lakh in a 100-bagger and harvesting Rs 1 crore. Of course, we’re talking of this happening within a reasonable period of, say, three or five years, not a lifetime.

Every three or five years, along come a few of these ‘baggers’. A quick look at the past 10-20 years indicates that for any such period there are about 10-20 such baggers. Stalking the 100-bagger is something of an art form, and one I would definitely like to learn while I am in the investing game.

There are over 6,000 stocks in the market today and locating potential ‘bagger’ candidates can be a difficult proposition. Even if you tell me they are well-managed companies, with good growth, etc, how on earth am I supposed to find just those few that will zoom up a 100 times over the next five years?

Taking on a sleeping giant. Look at some of the multi-baggers of the past — Hero Honda, Zee Telefilms or Castrol. One common feature among many of these companies is that they were faced with a large competitor who was not overly bothered with providing what customers wanted.

Take Zee Telefilms. All it did was take on the might of Doordarshan, and about 10 years ago, there were not too many people who were happy with DD. Remember the three-hour programming a day? Or the all-too-frequent ‘Sorry for the Interruption’ sign on TV?

Or take the case of Hero Honda. Before it vroomed into the Indian two-wheeler industry, customers had to be content with the two-stroke scooters from Bajaj. A scooter that you had to tilt 45 degrees before starting and which gave a miserable 40 km per litre. What did Hero Honda do? It came out with a bike that gave 80 km per litre and a much smoother riding experience.

There are several such cases of the ‘big and mighty’ being tamed. I’m sure the Maruti stock would have performed wonders if it had been listed. Why? Simply because it gave a product far better than the Ambassador or Fiat that had ruled the market for over 30 years. There are many such examples: Titan vs HMT, Jet vs Indian Airlines or Castrol vs Indian Oil.

How do you spot it? Anyway, the point I am trying to make is that, in stalking a multi-bagger, there’s one simple ploy. It is easier to identify a big company that makes products you are deeply disgruntled with, and then look for its smaller competitors. It’s far easier to spot a seven-foot sloppy man in a crowd than a 5 ft, 6 inch agile man! Try to locate an efficient high-growth company, something most people will advise.

Take the case of HDFC Bank vs State Bank of India. It takes about 15 minutes to draw money at most branches of SBI and less than a minute at HDFC Bank. To open an account with SBI is a nightmare. With HDFC, just call them and they send a man to your house. Why, you can even order a draft over the phone! Clearly, the days of customers being taken for granted by those huge banks are coming to an end. On the other hand, SBI is a Rs 1,00,000-crore bank and HDFC a Rs 6,000-crore one. Which simply means that the latter has a long way to go!

The point is that HDFC Bank will most likely grow rapidly for a long time. Simply because it is better at providing what customers want. If that does happen, the chances that the stock will turn out to be a 100-bagger are quite high.

Or take insurance companies such as LIC and GIC. These monoliths will find it difficult to move ahead, and I assume here that you aren’t too happy, as countless others are not, with the service you get from the present crop of insurance players.

If you come across any such large corporation — one that makes products you dislike but are almost forced to use — do let me know. I am sure we can track down the ‘David’ who will knock down that ‘Goliath’.