How to snare a multi-bagger ASX share: expert

How does one find the ‘next Afterpay’

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A businessman holding a butterfly net looks up trying toi catch a multi-bagger ASX share

Image source: Getty Images

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.

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.

Should you invest $1,000 in Afterpay right now?

Before you consider Afterpay, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Afterpay wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended AFTERPAY T FPO and Xero. The Motley Fool Australia owns and has recommended AFTERPAY T FPO and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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