A 10 bagger is a term coined by mutual fund guru Peter Lynch in his book, “One Up On Wall Street”. It refers to stock that is expected to soar to at least 10 times the purchase price. This means 1000% plus returns!!
Believe it or not, the current market conditions are ideal for finding the next ten bagger, you just need to know where to look. We have identified five, easy to follow steps that will help you identify your next 10 bagger.
1. Novel Technology
Technology is what drives the stock market. Look at the success of companies like Google and Apple. Early investors into leading high tech companies have made literal killings. In fact, many of millionaire investors became that way by identifying novel technologies and investing in companies providing these technologies.
Remember, the novel technology needs to have a huge potential user base, be easily adaptable by the masses, and something that people use.
A caveat is to be cautious about novel technologies that are just too novel. There are tons of companies pushing ideas and technologies that are just too far advanced to be widely accepted or are simple dreams of techies that will be difficult to turn into reality. Investors need to be able to avoid these pie in the sky type novel technology.
2. Societal Mega-Trends
Following societal megatrends is a key to finding 10 bagger stocks. The novel technology in step one needs to part of a mega-trend. This means that more and more people are moving into adopting the novel technology or anything else for that matter.
If you do not see the company being part of a mega-trend, but rather in a niche, the chances of it producing a 10 bagger stock is greatly diminished.
Think about the mega-trend toward PC’s, the internet, or smartphones. Many companies positioned correctly in these trends yielded 10 bagger plus stock investments.
Right now, social media, change from fossil fuels, and the internet of everything can be considered mega trends.
3. Sovereign Action
Sovereign or governmental action can have a huge effect on stock prices. Regulations and new laws can create and destroy markets and even trends. It is critical that whatever company you are looking at to produce the next 10 bagger is supported or at least off the government’s radar screen from damaging regulations.
I know this may seem wrong to most free market advocates who believe in a hands-off government policy. While in an ideal world, this is the best policy, investors need to deal with the reality of government intervention.
The important takeaway is to be sure to understand the impact government action will have on your investment and be aware of pending potential support or resistance.
Just like new technologies, companies with new products that fit into mega-trends have a strong chance to become ten baggers. Look for novel products that fill a need created by companies with the ability to produce and market. Remember, it takes more than just new products. The company needs to have the talent to sell these products to the masses. Look for firms that have a track record of creating extremely successful products that are launching additional products or lines.
5. Investor interest Everyone has the mistaken belief that it is best to locate stocks that no one else knows about. While you can get fortunate by purchasing a stock before most other discover it, it is not a consistent way to ten bagger performance. Be certain that there is a buzz around the stock that you are using in an attempt to get 1000% plus returns. It takes buying to push a shares price into the stratosphere. In fact, it take tremendous buying interest to make a stock soar 1000% or more. Therefore, it is critical that the stocks for your 1000% plus winner portfolio have widespread investor interest.
Now that we know the five things to look for when locating potential ten baggers, what is the best way to drill down into the list to locate those stocks most likely to produce outsized returns.
The key is to search for value rather then price. Let me explain:
Buying stocks that have fell on hard times or just out of Wall Street’s favor is a time-honored way to earn large returns.
Remember, there is a difference between value and price in the stock.
What this means is price doesn’t always reflect the actual value of a company. Finding these disconnects of value and price is one key to successful ten bagger picking.
How does one go about locating these stocks? Well, there are several ways. The standard way is to crunch the fundamentals to determine innate value. While this way can work, I consider it incomplete because it fails to consider the future path planned for the company.
In other words, it’s just a snapshot of now. It doesn’t take into consideration the likelihood of the company’s future plans adding value thus lifting the stock price in the future. Remember, the future is what we need to be concerned about as investor.
The now, while a good starting point, isn’t going to be relevant after you buy the shares. This is why looking at the company’s plans and recent fundamental trend is more important than the current condition. An improving fundamental trend combined with management plans to increase value is what I look for when filtering investment candidates.
The Key Points:
The key points are to apply the five steps to locate your first ten bagger. Be certain not to take any shortcuts or skip one of the steps.
Next, drill down into the list looking for value in the company not yet reflected in the stock price.
Remember, future value is much more critical than present value for investors.