Mark Mobius, in his article “When Small is Big” has pointed out that the secret to multibagger stocks is finding companies that are small in size, but with big long-term potential.
Mark explains that in emerging markets like India, a handful of large companies, typically from the energy, banking, telecommunications, heavy industry and mining sectors, dominate the stock exchanges. These companies are influenced by political and global macroeconomic factors rather than the local economy.
It is very unlikely that these huge conglomerates will give you multibagger profits. On the other hand, you have to take a “bottom-up” approach to investing and find attractive opportunities in small and mid-cap companies which have the potential to grow to be the giants of the future Mark says.
Mark Mobius explains that the potential multibagger companies will generally be found in entrepreneurial sectors such as consumer discretionary and light industrials. He adds that many of these companies are more domestically oriented than their larger counterparts, and thus can be better aligned with the factors driving economic growth in the individual country or market in which they operate.
Mark Mobius emphasizes that the reason these small and mid-cap stocks have a better chance of becoming multibaggers is because they are typically more consumer-focused than their larger peers. This exposes them to the great “middle-class” of the population.
The great “middle class” of the population is growing, and it is having a dramatic impact on consumer behavior in emerging markets. It is the key potential driver of the profitability of companies operating in emerging markets like India, Mark says.
Mark Mobius uses simple logic to explain why the middle-class is a big force to reckon with. With more money to spend, many people in emerging markets are clamoring for consumer goods, from beer to clothing to cell phones. Additionally, as people gain more status, they often gain more clout to influence politics and policy—for the better.
Mark also explains that the smaller companies are often at an earlier stage in their life cycle, and thus can offer the potential to experience faster growth than the broader equity market.
Investors must identify small companies that have come to dominate local consumer sector niches through strong manufacturing, marketing and management systems Mark Says. He adds these companies use skills honed in their local market to expand into neighboring emerging market and that they enjoy accelerating growth.
Mark cautions that there are potentially negative aspects of investing in small companies (such as absence of corporate governance, siphoning of funds etc, increased volatility, limited liquidity) but adds that these risks are manageable.
Mark Mobius adds the words of wisdom that the art of investing and finding multibagger stocks requires patience and long-term focus. He urges investors to be enthusiastic about the process of investing because there is a huge number and variety of opportunities that are present in emerging markets like India.