Are Ten Baggers Easy To Find?
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I just read Peter Lynch's One Up On Wall Street. Although it was originally published over 20 years ago it still remains one of the premier investment books around. He provided lots of great advice about how to buy stocks (and even when to sell).
One of the themes in the book is that the individual investor should always be on the lookout for those "ten baggers" or "twenty baggers," stocks that appreciate by 10 or 20 times.
How easy is it to find those companies?
In 1989 Mr. Lynch suggested that stocks of rapidly growing (20% to 25%), smaller ($1billion market cap) companies with low debt, good management, a recognizable brand name and some sort of competitive advantage (i.e. a wide moat) had the best chance to appreciate 10 or 20 times or more.
However, he also stated that not every stock with the right characteristics would necessarily be successful. He said that typically only about 2/3 of the stocks even in a carefully chosen portfolio would appreciate significantly over a reasonable time period.
What if you had applied the criteria in 2002 and found that there was a relatively small but still well known company out there with a market cap of about $4.4 billion with strong earnings growth and that the year before had released a revolutionary product that people were buying in droves? You would have found that ten bagger (and more).
That company is Apple, Inc. (NASDAQ: AAPL). The first i-device, the iPod, was released in November 2001. The next year Apple started rapidly growing earnings. It already had great management in place (led by the late Steve Jobs) and a very good brand that created a following that could be characterized as "cult-like."
Assuming that you recognized that Apple was selling a zillion iPods and was about to take off and bought the stock in November 2002 it would become a ten bagger even before the release of the original iPhone in 2007 and a twenty bagger before the release of the iPad in 2010. Today it is a 92 bagger !!!!!
If you were slow to pull the trigger and didn't realize Apple's potential until a year after the release of the iPhone or the iPad it would have been "only" about a grand-slam (4 bagger) for you. Still not bad but a big difference than if you had bought in 2002.
How about a company that introduced a new method to buy something that had been in existence for hundreds of years? You could have profited greatly if you recognized the innovation early enough.
Amazon.com (NASDAQ: AMZN) began selling books on-line in 1996. It took several years for the company to generate profits and grow earnings. Assuming that you thought the concept of buying a book using your computer and having it delivered right to your door was a game-changer and purchased the stock in the fall of 1997 it would have been a 60 bagger for you. If you followed the traditional path and waited until the early 2000's to observe more consistent earnings it would have still been a 19 bagger, or almost 5 grand slams. Not too shabby.
Another company to consider would have been Chipotle Mexican Grill (NYSE: CMG). The stock reached $442 in April 2012, about 10 times higher than it was in January 2006.
If the prudent investor recognized that Chipotle was rapidly growing earnings after its divestiture from McDonald's Corp. (NYSE: MCD) in 2006, that it had lots of cash, great management and there was plenty of room to expand outward from its base in Colorado they would have been rewarded.
Chipotle stock has significantly outperformed its former investor McDonald's (by 5 times), and even Apple up until April of this year. McDonald's is a pretty good company in its own right. Earnings have grown about 18% a year over the last 5 years and it pays a decent dividend resulting in a yield of about 3%.
How about the next ten or twenty (or even 92) bagger? Where will it come from?
It's out there somewhere. A good starting point would be to look for those fast growing, small companies with low debt, good management and a wide moat. History is bound to repeat itself.
Mathman6577 owns shares of Apple and McDonald's. The Motley Fool owns shares of Apple, Amazon.com, Chipotle Mexican Grill, and McDonald's. Motley Fool newsletter services recommend Amazon.com, Apple, Chipotle Mexican Grill, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.