Where to find "ten-bagger" stocks – the market's Holy Grail
“Ten-baggers,” stocks with the potential to rise tenfold, are rare but not impossible to find. Dr Mike Tubbs explores their key characteristics and suggests where you should start your search
A ten-bagger is the stockmarket’s Holy Grail: a company whose share price rises tenfold, or 900%. The term was coined by Peter Lynch, the legendary fund manager whose Magellan Fund was a ten-bagger and the best-performing fund in the world from 1977 to 1990, averaging growth of 29.2% per year. An investor putting $1,000 into Magellan in 1977 would have turned that stake into $28,000 by 1990.
Lynch managed to identify many ten-baggers and these made important contributions to his fund’s outperformance. It’s well worth trying to emulate him, but it isn’t as easy as he made it look. This article highlights some examples of ten-baggers, explores their key characteristics and suggests where you may be able to find new ones.
The ten-bagger stocks that dominate the US market
The most famous recent ten-baggers have been American companies and they are some of the biggest names in the US equity market. They include Walmart (which soared from $10 in 1991 to $100 in 2018), Alphabet ($120 in 2005 to $1,200 in 2018), Microsoft ($11 in 1997 to $110 in 2019), Facebook ($20 in 2012 to $200 in 2018) and Apple ($17 in 2007 to $170 in 2017). Whereas Walmart took 27 years and Microsoft 22 years, Facebook required a mere six. That reflects a compound annual growth rate of a staggering 47%. A stock rising tenfold in nine years would notch up compound growth of slightly over 29.2% per year, the average annual growth rate of Peter Lynch’s Magellan Fund.
As with all shares, some ten-baggers fade away; some keep going, but far more slowly; and some fall back significantly but then embark on another growth spurt that eclipses the initial run. Britain’s Immunodiagnostic Systems, for instance, rose from 119p in mid-2006 to 1,200p in mid-2011, becoming a ten-bagger in just five years as the company benefited from strong interest in vitamin-D testing. However, the shares fell sharply during the rest of 2011 and have mostly been in the range of 170p-300p for the last five years.
Amazon is a good example of the third type. If you had invested $100 in Amazon at its initial public offering (IPO) in 1997, you would have bought five shares. Those became 60 through stock splits in 1998 and 1999, implying an initial price of $1.67 per share. Each share was worth $105 in April 1999 only to crash to $6 in September 2001 after the dotcom bubble. But if you had hung on then, you would have made a fortune. The shares soared past $2,000 in August 2018 – a rise of 333 times from 2001, making them 1,000-baggers from the IPO.
What ten-bagger stocks have in common
Ten-baggers are usually companies that come early to substantial growth markets and have the potential to dominate their subsectors or niches. These growth markets are typically driven by major trends in society, the growing use of mobile phones being one recent example. Ten baggers also usually have patented new technologies and/or new products or services that enable the company to take a leading position in its subsector or niche and establish an enduring competitive advantage over new entrants.
The new technologies or products may be supplemented by bolt-on acquisitions to enhance the product range and fend off competition. Smaller companies can grow very fast, but can often find it more difficult to become leaders in their market niches, so acquisitions can be crucial.
An example of a new technology or new product in a growth market was Apple’s launch of the iPhone in June 2007, which took Apple into the fast-growing market for smartphones with software and design superior to the market leader, Nokia. A much smaller British example that used related acquisitions to help cement its market-leading position is Judges Scientific.
Judges has built a business in precision instruments for scientific research and testing and now has 14 divisions providing a wide range of instruments from electron microscopy and ultra-high vacuum components to fire testing, optical fibre testing and the computer-controlled testing of soils and rocks. Judges’ shares rose tenfold between 2010 and 2013 in only three years, then dipped but went on to rise again. By late 2019 it had become a 40-bagger.
A larger UK company that has built on a trend and made many acquisitions is JD Sports Fashion. It early on spotted the trend for large numbers of non-sporting people to wear sports-related gear and that they outnumbered customers who actively participated in a sport. This powered the share price from 33p in early 2012 to 330p in late 2016. The shares reached 450p in mid-2016, dipped a bit, then rose to over 830p recently after strong Christmas trading.
Another UK consumer product example is Fevertree Drinks, whose novel mixers powered the shares from 210p in early-2015 to over 2,100p in mid-2017 – a ten-bagger in 2.5 years. Fevertree was over 3,800p in September 2018, but was back to under half this level recently after a profit warning.
There are several characteristics to look for when trying to identify potential ten-baggers. None of them provide certainty, but they do increase the chances of success.
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