As most investors would know, finding an ASX share that can beat the market is a hard enough task in itself. The goal of most investors is to outperform the S&P/ASX 200 Index (ASX: XJO) (or similar index) over time.
If you don't, you're left with the slightly awkward position of being better off investing in an index exchange-traded fund (ETF). So finding an ASX share that is a market beater, that's one thing. But finding an ASX share that turns out to be a multi-bagger, that's the Holy Grail!
So how does one find shares that can double your money a few times over?
That's the question that Livewire Markets asked fund manager Luke Winchester, of small-cap focused Merewether Capital, in a recent interview. It makes for some interesting reading.
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Expert tells us what to look for in a multi-bagger ASX share
So, Winchester tells Livewire that the first thing to look for is growth coming through 'three levers':
What you really want to find is that growth coming through, I guess, in three levers, which is the top-line revenue growth, but that's also filtering through to margin expansion, which means the profits are growing faster.
But then what really drives those big multi-bagger moves is when the multiple the market is paying for the business expands as well.
We all like to assume a growing company will just 'keep on growing', but Winchester says that you have to keep your eye on the ball:
…my rule of thumb is to avoid looking too far into the future. Two to three years is where most people can get an accurate forecast. Beyond that, you're probably crystal-ball gazing, particularly for a microcap, because these are volatile businesses.
Look for the slow burn
Winchester points out that many people look at Afterpay Ltd (ASX: APT) or Xero Limited (ASX: XRO) and want a quick repeat performance. But he says that most investors should lower their expectations:
Afterpay is the post child of that multi-bagger effect. The adoption of the product was so quick, and the share price and the business itself just exploded. That's a once in a lifetime stock for people.
When I see people talk about the next Afterpay, or even the next Xero, which is a slower burn, I take a step back. They genuinely are once in a lifetime stocks for people if you did get in early and hold all the way.
My multi-baggers are probably much more boring than an Afterpay. It's not that explosive growth. It's not 10 bags in a few years. But it's sustainable growth.
So there you have it. An expert's opinion on how to find a multi-bagger ASX share. Not all of will be able to find the 'next Afterpay' or even the one after that. But there's no harm in trying.
