The Rocky Road to Multi Bagger City
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems to be human nature to look for the path of least resistance to a given target; we often look for the easiest path to our goals. This concept is magnified in the world of stock market investments. Who doesn’t want to pick up a little known company with no earnings, great potential growth and wonderful management and watch it grow uninterrupted to 2, 3, 4 or more times what you had initially purchased it for? I know I do and I am always looking for that type of investment, but similar to early conquistadors who search for the golden city of Eldorado this search is often in vain.
If the road to multi bagger city was that easy everyone would be able to do it and it would take very little knowledge, research, intelligence and fortitude to find. If climbing Mount Everest was as easy as walking up a paved road at a gradual incline for a couple weeks with very little chance of death or injury, reaching the summit would not seem such a feat. Similarly in the market a company that has the potential to grow several times in the relatively short (2-3 year) time span is a company that by nature will have to have more volatility. Whether you’re a momentum investor, chartist, or value investor you can easily see that the road will have ups and downs, but hopefully in the end more up’s then downs. This being said when looking to get to mulit bagger city you must be prepared to climb steep summits and navigate dangerous descents without losing track of your ultimate goal.
Looking at two companies both of whom have been recommended by the Motley Fool you can see this play out. Westport Innovations (NASDAQ: WPRT) has had a series of corrections caused by news that at the surface was considered bad by some investors but if scrutinized doesn't seem to have a huge effect on the company’s future potential, direction or ability to grow. When Westport signed their deal with Cummings it was seen as a perfect match that almost guaranteed Westport to be profitable in the near future with a huge potential upside in North America, Europe and really the rest of the world. When news hit that Cummings was going to develop their own diesel engine investors started panicking without really knowing the meaning of the announcement or how it would affect the companies working relationship. The announcement doesn't change the direction of Westport, their potential for future growth, or their present business model. Why would investors in a company with no income be so skittish? The company has been more than a two bagger since it was first recommended by the Motley Fool and until now their hadn’t been any real changes in the upward direction. It has been down recently over 12% from its highs and investors start to wonder if it’s still a good investment. Its business model, the market, and its potential remains unchanged with any major developments and the point is it’s still a good investment. Of course it is a risky investment as the company doesn’t have any income and if it will become another multi bagger from this point is never guaranteed, but one thing is for sure it won't be an uninterrupted ride.
Investors must remember that regardless of the short term swings (let's say a swing being 10% in either direction) for reasons that don't fundamentally change the business or are caused by wider market changes should not be seen as indicators that the sky is falling. Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) are two tech titans have seen pretty big decreases in share price, but I wouldn’t be running to sell my shares in either company.
3 D Systems (NYSE: DDD) was up over 10% this week and it had more to do with a merger of two other companies in the 3 D printing space. The company is in the same industry which has a lot of potential for growth, is still as risky as the industry is nascent, and could easily become a multi bagger or a flop depending on the direction of the industry as a whole goes. These corrections are more of a call to check in with the company and evaluate if the story is the same or something fundamental has changed. If there has been a fundamental shift in some aspect of the company or the market then it becomes time to re evaluate the investment. We should remain focused on the management of the business, the company’s ability to grow their market share and revenue and the upside potential the company has within its market. Keeping that kind of focus will help you ride out the ups and downs and in several years be sitting atop your own mountain visiting multi bagger city.
Motley Fool newsletter services recommend Apple, 3D Systems, Google and Westport Innovations. The Motley Fool owns shares of Apple, 3D Systems, Google and Westport Innovations. mooseelz owns shares of Apple and Google. 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.