'Companies with good managements deliver in the long run'

Rahul Oberoi/Money Today | Print Edition: April 2011

Pankaj Pandey, Head of Research, ICICIdirect, tells Rahul Oberoi that it is important to stick to companies that give consistent results over 6-7 years.

Is there a way by which one can pick stocks which can surge more than 10 times in the long run, say, over 6-7 years?
There was never any secret recipe invented to spot multi-baggers. There are some which give transitory gains but if you aren't clued in on the markets, these can produce nasty results. It is, thus, important to spot the long-term performers which can produce consistent results over 6-7 years. To spot these, you need to check their core business model, relative market position and competitive positioning, management bandwidth and historical track-record under various market cycles. Also, one must look at the ability to deliver sustainable core earnings and finally, valuation. Some of the multi-baggers over the past two decades have been Infosys, Hero Honda, Lupin, Sun Pharma.

ICICIdirect Head of Research Pankaj Pandey,
ICICIdirect Head of Research Pankaj Pandey,
When is it the right time to sell such stocks?
For a long-term investor, it is critical to remember the objective with which he had initially picked a company that turned out to be a multi-bagger. If there is an opportunity to invest in stocks which can give better returns, then it is a good time to exit. Another thumb rule would be to re-evaluate your portfolio when such stocks start getting over-owned and tend to overshoot their fundamentals.

What should an investor holding multi-baggers do when they show weakness?
A long-term investor must keep a close watch on the business fundamentals of the company, sustainable free cash flows, and the dynamics of the business. Since long-term multi-baggers take several years to fructify, investors should have patience and not get perturbed by the occasional market volatility. Invariably, stocks with sound fundamentals do not lose out much during market corrections.

Is it advisable to buy such stocks on declines?
No one can predict market movements. If the fundamentals of the stocks that you have identified look good and there is business growth on the horizon, you should invest and stay invested for a long time. After all, no price is the right price. Companies having sound managements do deliver in the long run.

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