Three Potential Multibaggers

By Steven Heller - October 17, 2012 | Tickers: AAPL, EBAY, ILMN, IBM, NUAN | 0 Comments

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Growth investors are a lot like detectives in that we collect evidence to determine if a company has home-run potential.  We look for clues that offer reasons why companies deserve a more detailed review.  But where should you start? 

I started by taking a page from fellow Fool, Jeremy Bowman, and his How to Find 10-Baggers piece.  To reiterate, Jeremy defines finding a 10-bagger by identifying a company that meets this criteria:

1. Mass appeal.  Niche products or services won’t fit the bill here.  Don’t get confused that a small market saturation is niche-like.  A massive amount of people should be seen as potential customers of the company in question.      
2. Growth potential.  There has to be big potential growth ahead of itself.  Signs of accelerated adoption are always a plus.   
3. Size.  Mega-cap companies aren’t as likely to double, triple, or even quadruple, due to their sheer size.  Jeremy recommends finding a company in the $1 billion range that can grow to the $10 billion range.  I might be going out on a limb here, but I think that finding doubles, triples, or quadruples, won’t disappoint your portfolio.  In other words, I think the size requirement can be broadened.       

To help weed out impostors, I’ve gone ahead and added a few additions:

1. Innovation.  A company that is innovating ahead of the competition is a great sign.
2. Destructive nature.  Does this company change our behavior?  Can its products or services threaten competitors?  Is there potential to create a new industry?  If so, you’re getting warmer. 
3. Clear vision.  Having a clear strategic direction gives investors transparency of what to expect in the future.  It also helps management portray an image of confidence and discipline.  Both are welcomed attributes to look for when finding the next multibagger stock.    

Based on the criterion, I’ve identified three companies that fit the bill:    

1. Nuance Communications (NASDAQ: NUAN).  Voice recognition technology is going to become a more integral part of our daily lives.  The mass adoption of smartphones has brought using-your-voice-instead-of-your-keyboard to the mainstream.  On average, voice input is three times faster than typing and increases productivity.  Nuance currently has the best technology available and also operates in the highly lucrative automotive and medical transcription industries. 
   
   Two highbrow clients include Apple (NASDAQ: AAPL) and International Business Machines (NYSE: IBM).  Apple's Siri and IBM's Watson utilize Nuance's technology to interpret natural spoken language.  When tech titans like Apple or IBM endorse a technology, I take notice, and consider it a vote of confidence.
                      
2. Illumina (NASDAQ: ILMN).  Their DNA sequencing technology is paving the way to personalized medicine.  In the next decade, doctors will be able to analyze an individual’s DNA to find the best treatment available.  It will allow them to understand how a potential drug would interact with a patient’s makeup before treatment.    
   
   We are still years from personalized medicine becoming a healthcare standard.  First, scientists must collect and analyze obscene amounts of data to create a basis of understanding.  Only after that point can they offer useful medical advice.  In the meantime, we are on the cusp of $1,000-a-pop DNA sequencing, which is projected to become possible by the end of this year.  This should speed up the process of data gathering, making personalized medicine even closer to reality.       
   
   Still, Illumina is the leader of the pack because their products are the most accurate in the industry.  And personalized medicine will happen.
             
3. Ebay (NASDAQ: EBAY).  Don’t let its $60 billion market value fool you.  They are making huge inroads with developing PayPal offline.  They’ve announced deals with VeriFone, Discover Financial, Home Depot, Abercrombie & Fitch, Office Depot, and others to accept PayPal payments.  The Discover deal alone opens up PayPal to over 7 million retailers in the US.      
   
   McDonald’s is also testing a PayPal platform in France that aims to improve checkout times.  Burger lovers can use their smartphone to order and pay, and they only wait in line to pick up their meal.  If successful, this small trial could expand across their 30,000 plus restaurant footprint. 
   
   PayPal is making the right partnerships and has over 113 million active users to leverage for its offline initiative.  Transaction volume is up 20% from the previous year, yet its size still dwarfs in comparison to the $2.5 trillion dollar payment industry.  If they can gain any meaningful market share offline, it would be a game changer for investors.      

Bottom Line
All three of these companies have the qualities I look for when I’m hunting for a multibagger.  Each are innovators in their respective fields, threaten their competitors, and have a clear direction of where they are headed.  They have the mass appeal and growth potential needed for multibagger promise.    

In the end, I strive to invest in companies that will do the heavy lifting for me over the long-term.  I feel so strongly about these investments that they all have made their way into my personal portfolio.                                   

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