{"id":1602,"date":"2022-12-14T10:58:52","date_gmt":"2022-12-14T18:58:52","guid":{"rendered":"https:\/\/smallcapdiscoveries.com\/?p=1602"},"modified":"2022-12-14T10:58:52","modified_gmt":"2022-12-14T18:58:52","slug":"understanding-multiple-expansion","status":"publish","type":"post","link":"https:\/\/smallcapdiscoveries.com\/articles\/understanding-multiple-expansion\/","title":{"rendered":"Understanding Multiple Expansion"},"content":{"rendered":"
While it\u2019s important to be prudent and reasonable with growth expectations, it\u2019s also good to remember that smallcap stocks can produce phenomenal gains.<\/p>\n
We\u2019re talking about the homeruns that turn $10,000 into $1 million, producing the kind of windfall that changes lives and creates investing legends. And while there are many factors that go into what makes this happen, the most crucial point\u2014the pang of regret we\u2019ve all felt when hearing about these stocks\u2014is finding them before everyone else.<\/p>\n
There are many excellent resources that can get you started on this journey. This includes a great book by Chris Mayer, titled 100 Baggers: Stocks that Return 100-to-1 and How to Find Them<\/em>. Our approach includes a lot of the aspects Mayer talks about, expanding on them with our own proven and unique style.<\/p>\n Finding a rapidly growing company early is an important part of what\u2019s needed for a multi bagger, but another critical element to multi-baggers is multiple expansion<\/span><\/em>. This is where the value, or multiple, prescribed to a business, be it price to earnings, EV\/earnings, price to sales, etc, expands as the company continues to grow in size. And it\u2019s about understanding what drives this multiple expansion. For instance, when you see a stock\u2019s value going from 5 to 20 times earnings, this represents a 4 x of the multiple. If fundamentals haven\u2019t changed, this means, for whatever reason, people have valued it 4 times higher. But if fundamentals have changed (e.g., earnings tripled), and the multiple has expanded from 5 times earnings to 20 times, this combination of earnings growth and multiple expansion means the stock\u2019s value increased by 12 times! This happens more often than you may think but you must know where to find these opportunities.<\/p>\n Multiple expansion is obviously something you want to happen, as it increases the value of your investment, but what causes it?<\/p>\n <\/p>\nAttractive Valuation<\/strong><\/h2>\n