Finding UK shares with multibagger potential is incredibly difficult. In the world of investing, nothing is ever guaranteed. Just because a stock looks like it could be a good investment today does not mean it will yield high returns. Despite these challenges, I’ve recently been looking for shares to buy for my portfolio that could double or even triple in value. Here are three companies I’m considering buying as a result.
UK shares
As mentioned above, it can be challenging to select high-growth stocks. As such, I’ve developed a framework. I’m looking for companies that have three distinct characteristics.
First, the UK shares I’m looking for must have a market capitalisation below £1bn.
Second, the stock’s price/earnings-to-growth (PEG) ratio must be below 1. This ratio gives investors a rough guide to how cheap a business is compared to its projected growth. A ratio of less than one implies the stock looks cheap compared to projected growth. That said, this figure is only a rough guide as it is based on earnings projections.
And the last criteria I’m looking for in the UK shares to buy is a low level of debt. In my experience, there’s nothing more damaging to a company’s growth than a high level of debt. High levels of borrowing can strangle growth by reducing the capacity for the firm to invest in its future. As such, I’m only including businesses in my search that have a net debt-to-equity ratio of less than 100%.
Based on these criteria, I have found three UK shares to buy that I think have multibagger potential.
3 shares to buy
The first company on my list with a market value of £811m at the time of writing is the waste management group Biffa. With earnings per share projected to expand by 270% between 2021 and 2022, the stock is trading at a PEG ratio of 0.6. Its ratio of net debt to shareholder equity is 0.8.
These metrics suggest the company has potential over the next few years. That said, Biffa has faced challenges in the past. Regulatory headwinds, rising costs, and bad acquisitions have all constricted growth.
There’s no guarantee these issues won’t appear again in the future. So, while I would buy Biffa today based on its potential, I plan to keep an eye on the risks above.
I would also buy Essentra as part of my basket of UK shares. The manufacturer and supplier of packing products is selling at a PEG ratio of 0.6 based on growth estimates. It has a market value of £875m and a net debt-to-equity ratio of 0.3% at the time of writing. As well as its growth potential, Essentra also offers investors a 3.2% dividend yield. Unfortunately, this payout, like all dividends, is not guaranteed.
Between 2019 and 2020, the group slashed its dividend by 85%. The same could happen again. This risk, coupled with the chance that Essentra may not hit the City’s growth forecasts, are the two main risks investors face here.
The final stock I would buy is Liontrust Asset Management. This company has a market capitalisation of £800m, a PEG ratio of 0.5 and a net cash balance sheet position. While this business does look like it has enormous potential, it faces risks such as competition from lower-priced competitors and regulations. These headwinds may weigh on growth in the long run.
