{"id":3291,"date":"2018-01-26T08:04:52","date_gmt":"2018-01-26T00:04:52","guid":{"rendered":"https:\/\/www.smallcapasia.com\/?p=3291"},"modified":"2018-01-26T08:04:52","modified_gmt":"2018-01-26T00:04:52","slug":"why-multibaggers-are-generally-high-p-e-stocks","status":"publish","type":"post","link":"https:\/\/www.smallcapasia.com\/zh-hans\/why-multibaggers-are-generally-high-p-e-stocks\/","title":{"rendered":"Why are Multibaggers generally High P\/E Stocks? Is there a Reason behind?"},"content":{"rendered":"<p>First of all, let us understand what are Multibaggers&#8230;<\/p>\n<h2>What are Multibaggers?<\/h2>\n<p>By definition, Multibaggers are stocks that increased multiple times their initial investment values. A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. This term is coined by the legendary investor &#8211; Peter Lynch.<\/p>\n<p>Some notable characteristics of Multibaggers include:<\/p>\n<ul>\n<li>Undervalued stocks with strong fundamentals<\/li>\n<li>Strong on corporate governance<\/li>\n<li>Businesses which are scalable within a short span of time.<\/li>\n<\/ul>\n<h2>How about P\/E ratio?<\/h2>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-3296\" src=\"https:\/\/www.smallcapasia.com\/wp-content\/uploads\/2018\/01\/multibagger-pe-ratio.jpg\" alt=\"multibagger pe ratio\" \/><\/p>\n<p>Most investors would know what is P\/E ratio because it is the most commonly used ratio when it comes to stocks investing. And generally, a stock with a lower P\/E is perceived as a better investment than a stock with a higher one.<\/p>\n<p>The idea behind this perception is that\u00a0companies with low P\/E ratios may indicate that the stock is undervalued. Investors can then buy them at a discount and then sell for profit when the stock price &#8216;reverts&#8217; back to the mean.<\/p>\n<p>However, the flip side is also true.<\/p>\n<p>In actual fact, P\/E ratio indicates how much investors are willing to pay for every dollar of earnings and a high P\/E ratio indicates that investors expect higher earnings. In other words, people associate a high P\/E ratio to a stock because they believe that it can continue to grow a lot more in future.<\/p>\n<p>That brings me to one point:<\/p>\n<p>Why is it that global tech or social network stocks like Facebook, Tencent, Amazon, Alibaba, Netflix can turn out to be Multibaggers despite trading at exorbitantly high P\/E ratios (&gt;30x) a few years back?<\/p>\n<p>I did a little digging and found the perfect answer: <span style=\"text-decoration: underline; color: #ff0000;\"><strong>The Power of Compounding<\/strong><\/span><\/p>\n<h2>How Good can become Great<\/h2>\n<p>&nbsp;<\/p>\n<p><img decoding=\"async\" class=\"aligncenter size-full wp-image-3292\" src=\"https:\/\/www.smallcapasia.com\/wp-content\/uploads\/2018\/01\/long-term-compounders.jpg\" alt=\"\" \/><\/p>\n<p>Check out the screenshot above &#8211; Reinvestment Corp (R) and Undervalued Corp (U):<\/p>\n<p>Both cpy R and U start off with the same earnings base. Cpy R starting P\/E ratio is 20x while Cpy U is 10x.<\/p>\n<p>While Cpy R trades at double the P\/E ratio than that of Cpy U, it reinvest 100% of its earnings and achieve 25% Return on Retained Earnings compared to 10% from Cpy U.<\/p>\n<p>Fast Forward 10 years, if you apply the same P\/E ratio to both companies, <strong><em>Cpy R net worth is 471% more than Cpy U<\/em><\/strong>! Cpy R just beat Cpy U hands down and become from Good to Great.<\/p>\n<p>Read more:\u00a0<a href=\"https:\/\/www.smallcapasia.com\/why-you-should-consider-investing-in-small-cap-stocks\/\" target=\"_blank\" rel=\"noopener\">https:\/\/www.smallcapasia.com\/why-you-should-consider-investing-in-small-cap-stocks\/<\/a><\/p>\n<h2>Ending Note<\/h2>\n<div class=\"a-sum\">\n<p>In short, a multibagger is what i would name as a &#8220;Compounder&#8221;. Compounders have the capacity to reinvest its earnings at a high growth rate (double-digits), which results in explosive stock price performance over the long term.<\/p>\n<p>As per SeekingAlpha&#8217;s Long Hill Road Capital:<\/p>\n<p><em>&#8220;They often look expensive on short-hand valuation metrics, but investors should instead focus on returns on reinvested capital. Holding compounders for the long-term minimizes investment mistakes and behavioral errors, reduces trading costs, and defers taxes, all of which help us compound our wealth over decades.&#8221;<\/em><\/p>\n<p>Simply put, don&#8217;t be spooked by the high P\/E ratio of a wonderful business at 1st glance. If you predict that it will deliver consistent high growth rates over the next few years (long term), it will be considered as a &#8220;Undervalued&#8221; stock today. And the only way to know whether your thesis works out is by holding it for the long run.<\/p>\n<p><!--more-->Fancy a simple 10-Step System that teaches you how to investing profitably? Simply click here to receive your copy of a brand-new <strong>FREE<\/strong> <strong>Ebook<\/strong> titled &#8211; <strong><em>\u201c100 BAGGERS\u201d <\/em><\/strong><em>by Christopher W. Mayer<\/em> [thrive_2step id=&#8217;1969&#8242;]<strong><em><u>here<\/u><\/em><\/strong>[\/thrive_2step] today!<\/p>\n<p>Last but not least, do remember to <a href=\"https:\/\/www.facebook.com\/SmallCapAsia\/\" target=\"_blank\" rel=\"noopener noreferrer nofollow\"><strong>Like us on Facebook<\/strong><\/a> too as we share the latest investing articles and stock case studies for you!<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>First of all, let us understand what are Multibaggers&#8230; What are Multibaggers? By definition, Multibaggers are stocks that increased multiple times their initial investment values. A stock that doubles its price is called two-bagger while if the price grows 10-times, it would be called a 10-bagger. This term is coined by the legendary investor &#8211; [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":3293,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"fifu_image_url":"","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[359,360,361],"class_list":["post-3291","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-high-pe-stocks","tag-multibaggers","tag-multibagger"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/posts\/3291","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/comments?post=3291"}],"version-history":[{"count":0,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/posts\/3291\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/media\/3293"}],"wp:attachment":[{"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/media?parent=3291"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/categories?post=3291"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.smallcapasia.com\/zh-hans\/wp-json\/wp\/v2\/tags?post=3291"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}