How to Identify Stocks That Can Rise Tenfold... or More

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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In my last column, I talked about mastering the art of intelligent speculation.

One method is to follow The Oxford Communiqué's Ten-Baggers of Tomorrow Portfolio, a select group of speculative stocks with the potential to rise tenfold or more.

Here are six characteristics that we've found ten-baggers typically have in common...

1. They are tremendous innovators.

Companies that rise tenfold or more offer revolutionary technologies, new medical devices, blockbuster drugs, and other state-of-the-art products and services. Over the last 10 years, for instance, investors have been stunned by the moves up in Tesla (Nasdaq: TSLA), with its electric cars; Apple (Nasdaq: AAPL), with its cutting-edge electronics; and Amazon (Nasdaq: AMZN), with its breakthrough e-commerce platform and one-click ordering system.

2. They experience terrific sales growth.

Notice I said sales growth, not profit growth. A lot of the best-performing companies were not profitable in the early stages of their run-ups. But even if they were losing money, they usually experienced top-line growth of 30% or more.

3. They protect their margins.

Huge sales numbers attract competition the way honey attracts bears. That means a firm has to be able to protect its innovations with patents, brands and trademarks. Otherwise, competitors will flock to the industry, grab market share and force down margins.

4. They beat consensus estimates.

Profit growth is what drives share prices higher. But in the short term, it's all about beating expectations. Even if a company loses money - if the loss is smaller than expected - it can register as a significant beat.

5. They are small cap to midcap companies.

The best-performing stocks of the last few decades started out as small companies. And over the last century, small caps have outperformed large caps by more than 20% annually. Huge companies simply can't grow at the breakneck pace of smaller ones.

6. They are relatively unknown.

The less people understand about what a company is doing - and the less media and Wall Street coverage it gets - the better the chance that its shares are mispriced. Hot stocks with splashy stories have not been the best performers, historically. By the time a company becomes widely known, much of its parabolic move upward may well be over.

Our Ten-Bagger recommendations are qualitatively different from the other companies we recommend. They are smaller, sometimes unprofitable and almost always more volatile.

This requires us to use a different sell discipline.

We don't use our customary 25% trailing stop with the Ten-Baggers of Tomorrow Portfolio.

Instead, a sell recommendation is triggered if a company misses the quarterly consensus sales estimate by 20% or more - or if we believe the company's business prospects have changed for the worse in some fundamental way.

These stocks are meant to be held longer term. They will bounce around more than most. (In technical terms, they have a higher beta.)

And our exit is ultimately based not on share price fluctuations but on how the company's net compares with expectations.

How has this strategy worked in practice?

Very well. In 2017, the first full year for the portfolio, it returned 27.6%. The S&P 500 returned 21.6%.

As is typically the case, the vast majority of professional fund managers underperformed the S&P last year.

As you can see, intelligent speculation is not a contradiction in terms. You can enjoy higher-than-average returns without taking a boatload of risk.

Our Ten-Bagger strategy is not the only way to do it. But it's one of the best ways I've found.

If you want to hear more about the Ten-Bagger strategy, click here to gain access to my talk later this week at the 20th Annual Investment U Conference in Las Vegas.

In fact, you'll also gain access to all of the presentations from The Oxford Club's investment experts... and much more. If history is any indication, the insights and recommendations will dramatically increase your investment returns in the weeks and months ahead. Sign up by tomorrow so you don't miss out!

Good investing,

Alex

Thoughts on this article? Leave a comment below.

This Social Network Is a 10

Malcolm Forbes once said, "It's never too late to learn." That's how Alex hopes you feel each and every time he shares his investment expertise with you. Today's article was no exception - if you didn't know what intelligent speculation was before, you most certainly do now.

In December, Alex gave his Oxford Communiqué subscribers an update on Momo (Nasdaq: MOMO), one of his intelligent speculations in the Ten-Baggers of Tomorrow Portfolio...

Based in Beijing, Momo (Nasdaq: MOMO) operates a revolutionary mobile-based social networking platform that enables users to establish and expand social relationships based on proximity and shared interests.

The company only launched in August 2011. Yet it has already become a part of daily life in China. It is one of the country's leading social media platforms, with 94.4 million users.

Think of it as a cross between Facebook (Nasdaq: FB) and Twitter (NYSE: TWTR) but with location-based and video-sharing features built in.

The Momo mobile app is free. Yet the company also offers users a premium subscription package with additional functions and privileges.

Momo is following a two-pillar growth strategy. The first is product innovation to increase long-term user retention. The second is aggressive marketing to acquire new users and activate dormant ones.

While American investors have been slow to learn about the growth of Momo, local investors have not. Chinese e-commerce giant Alibaba (NYSE: BABA), for instance, was an early investor and is still one of the largest shareholders.

Momo posted monster third quarter 2017 results - revenue skyrocketed 126% and it beat expected earnings of $0.38 a share by 18.4%, or $0.45 a share. But its forward guidance disappointed some investors.

The market can hit companies that carry high expectations hard - and Momo was no exception. The stock plunged 29.8% on the news.

If we used a 25% trailing stop in this portfolio, we'd be out of the stock. But we don't - and Momo is a good example of why.

These more speculative stocks are too volatile for a trailing stop. These stocks often plunge one day and then rocket higher the next.

It's important to remember that short-term trades don't determine longer-term share price appreciation - earnings growth does.

And despite the volatility, the outlook here remains favorable.

Even with newly reduced expectations, the consensus is that Momo will earn $1.69 a share in 2017 and $2.17 in 2018. That's 28% profit growth.

Yet the stock sells for less than 20 times trailing earnings - and less than 15 times management's earnings estimate for the year ahead.

Momo is cheaper than the average company in the S&P 500, yet it is growing several times as quickly.

That's why Momo remains a "Buy." Expect the stock to be a bumpy but ultimately profitable ride.

- Donna DiVenuto-Ball with Alexander Green

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