How to spot stocks that could jump 100 times

You may be surprised to know that 47 stocks jumped more than 100 times their values in the past twenty years. You really wish you had known that a stock could take off like that. A growth like that does wonders to your money. Your Rs 1,00,000 investment becomes Rs 1 crore in 12 years flat.

But, how to pick such winning stocks amongst the thousands of stocks listed in the market? It may be difficult, but not impossible.

Here are five parameters you could consider:

1.       Size: Of the 47 companies that jumped 100 times, 44 were relatively small. Only three companies (Crompton Greaves, Godrej Industries, NMDC) had revenue over Rs 1,000 crore. “Considering growth in the economy, inflation, stock market levels, etc, the hunting ground for potential 100x stocks should be companies with market cap not significantly exceeding $0.5 billion or Rs 3,000 crore,” Motilal Oswal said in its report. This means, investors are advised to select stocks of companies which are small in terms of sales and market capitalisation. They should also be relatively unknown and thus not be researched much by analysts and institutional investors. As a result, it is likely to have low trade volumes in the stock market. This is because it is easier for a small company to grow at a faster rate than for already-established, large companies. You are then likely to get the best returns possible. Also, the stocks too would be relatively cheap.

2.       Quality: In the long-run, a stock rises when the company progresses. For this reason, stocks that rise 100-fold have a quality business as well as management. Quality depends on the profitability of the company’s business as well as the competency of the management. More importantly, it depends on the competitiveness of the industry. This is because, some industries that are more profitable than others. In FY14, 10 sectors alone contributed for 94% of total corporate profits, the brokerage report said. These are called high-profit pool sectors. The likelihood of a company growing in greater in such industries. This includes financials, oil & gas, technology, metals and mining, automobiles, power, consumer goods, healthcare, cement and auto ancillaries – in the order of their profitability.

3.       Growth: A company’s profit grows when there is a rise in its sales volumes, while costs remain stable or low. For this to happen, the company should have the power to price its goods without affecting consumer demand. This helps the company pass off any rise in costs to the consumer and safeguard its profits. For example, when there is high demand for a certain good, the company can afford to increase its price without worrying about a fall in sales. This company would then have a high pricing power.

4.       Longevity: Stocks, on average, take 12 years to rise 100-fold, the MOSL report said. This means, the company too has to grow over this the long term. Not just grow, but do so at a faster pace. This also depends on the competition in the industry. High-growth industries attract new entrants in the long run. This competition affects profitability and leads to a slowdown in the growth rate. This is why it is better to prefer companies in sectors which have low competition.