The Alchemy of Multibagger Stocks: An empirical investigation of factors that drive outperformance in the stock market

Hot growth stocks attract substantial interest from investors; however, future stock market winners are difficult to identify using traditional metrics of fundamental analysis (such as cash flow, profitability or earnings per share). This study investigates the characteristics of “multibagger stocks” – stocks that increase in value several times the original investment – and detects key drivers of their abnormal investment returns. An empirical analysis of 464 multibagger stocks listed on major American stock exchanges, each increasing in value by at least tenfold during 2009-2024, was conducted. A dynamic panel data model was developed to explain the sources of their outperformance and to predict future returns. The findings indicate that several traditional Fama-French factors, including size, value and profitability, remain significant predictors of future multibagger returns: small-cap high-value high-profitability stocks outperform. Additionally, the analysis identifies further important drivers of multibagger stock outperformance. These include fundamental, technical, and macroeconomic variables, such as high free cash flow yield, distinctive investment patterns linked to EBITDA growth, complex momentum effects with quick trend reversals that limit optimal entry points, and specific interest rate environment. This study advances asset pricing research by developing a novel, empirically validated model to explain the multibagger phenomenon. It offers valuable practical insights for investors and asset managers and provides a robust theoretical foundation for future stock screening strategies aimed at identifying potential multibaggers and maximising capital gains.