Finding 10-Baggers is Easier Than You Think
June 21, 2021
I believe finding potential “10-bagger” stocks – that is, stocks that can return at least 10 times your initial investment – is easier than you might think.
In fact, I might argue that setting a goal to merely seek stocks that can reach an arbitrary 10-bagger designation is too conservative. For perspective, when I interviewed “100 Baggers” author Chris Mayer for our 7investing Podcast last summer, he noted that his book details the common traits of 365 stocks that have multiplied investors’ money by at least 100 times in recent decades – and that’s just culling from the U.S. stock market alone! Suffice to say the number of 10-bagger stocks over the same period numbers in the thousands.
In fact, I believe every stock I’ve recommended to 7investing subscribers to date can become at least a 10-bagger for patient shareholders in the coming years. If I didn’t, I wouldn’t have recommended them in the first place.
But how do I go about finding them? There are several key things I look for, including:
Large total addressable markets ripe for disruption. First, in order to realize truly outsized gains, we need to find businesses that are chasing enormous (and preferably growing) total addressable markets relative to their current market capitalizations. And these businesses need to have well-liked, innovative or otherwise-unique products that are capable of either taking market share from larger industry incumbents, and/or carving out new addressable markets altogether.
Relatedly, it helps if these businesses have relatively small- or medium-sized market capitalizations to start. In general it’s much easier, after all, for a relatively modest-sized business (say, with a $1 billion market cap) to multiply investors’ money by 10X than it is for a $1 trillion (or one thousand billions) company to accomplish the same feat. Indeed, in his book Mayer notes that the average 100-bagger started with median annual revenue of around $399 million and a median market cap of $500 million. Those figures can arguably be adjusted higher today given the overall increase in median market caps in recent decades, of course; today I tend to search for businesses with market caps of $20 billion or less – though I’ll certainly go higher given the right opportunity. As fellow 7investing Lead Advisor Anirban Mahanti pointed out this month, Apple (NASDAQ: AAPL) became a 13-bagger over the last decade starting from a $200-billion base.
Finally, I look for stocks with underlying businesses that possess optionality to generate new revenue streams and further stoke returns. Can the company’s primary products be easily adapted to tackle new industries or additional verticals within their core markets? Does the company have multiple market-disrupting products? Can the business make acquisitions to expand its reach and supplement organic growth?
As for time horizons – and this is arguably the hardest part about owning 10-bagger stocks – investors would do well to recognize that more often than not multi-bagger returns generally take years to come to fruition.
I personally own several 10-bagger+ stocks that have remained in my own portfolio for over a decade, and each took several years to formally reach and exceed 10-bagger status. But there are exceptions, of course; I added shares of Tesla (NASDAQ: TSLA) to my portfolio in mid-2019 at a split-adjusted $42 per share, for one – good for a solid 15-bagger as of today. If anything, however, try not to let these relatively quick winners skew your perception of how long (years) it typically takes to achieve 10-bagger status. And due to the math of compounding, the bulk of the returns will occur in the latter years of your holding period.
Finally, should I be so fortunate to land a 10-bagger – or any stock, for that matter, that’s appreciated considerably from my initial cost basis – I’m seldom in a hurry to part ways with the stock. Remember, this is a long-term process we’re pursuing at 7investing, and in my experience winners tend to keep on winning over extended periods of time. To that end, it helps to build a comprehensive thesis for each stock (our 7th investing principle described at the link above) to ensure you understand why you own what you own. That way you can be sure to sell only if your thesis has substantially changed for the worse, if you absolutely need the money, or if the resulting allocation of your outsized winners relative to your overall portfolio grows large enough so as to cause you to lose sleep at night. Otherwise, I like to lean on the wisdom that winners tend to keep winning, and don’t mind continuing to let my 10-baggers run indefinitely if I can help it.