Finding stock market outperformers might appear difficult, and this difficulty will increase if your internal hurdle rate is large.
The key to success in this situation is to exercise patience and wait for the ideal chance to arise, at which point you may potentially make a big investment in your portfolio.
There are no called strikes in the world of investment, unlike baseball. Fortunately, there are several indicators that investors may look for to identify significant market winners.
In light of this, it’s critical to place a premium on revenue growth over all other metrics while searching for the next 10-bagger stock (which corresponds to a phenomenal 26% annualized return over a ten-year period).
Investors must use a strong filter when deciding which companies to buy since they need to earn a 26% yearly return for the whole ten-year period in order to attain that tenfold return. In other words, the threshold for what can be included in the portfolio is quite high.
Sales growth is one of the key indicators identified by asset management company AllianceBernstein as determining a stock’s success over a 10-year period.
Over a five-year period, the typical 10-bagger boosted revenue by 300%, while over a ten-year period, it raised revenue by 320%. Particularly for tech companies, sales increased by 820% during a ten-year period.
For instance, the share price of Netflix increased by 1,000% from the beginning of 2015 and the end of 2020. Sales soared by nearly five times during the course of those six years.
Then there is Block, a pioneer in digital payments, whose shares saw a 10-bagger run between its initial public offering in November 2015 and July 2020. The overall revenue for 2015 was $1.3 billion. It was a staggering $9.5 billion in 2020.
Block and Netflix are both ideal instances of businesses that were (and still are) riding big secular trends, one in the financial sector and the other in the streaming media sector.
It’s positive that AllianceBernstein’s research shown that 10-baggers are simpler to locate when inflation and interest rates are high, as they are at the moment. For investors seeking for equities with significant upside potential, this is encouraging news.
A stock’s potential to become a 10-bagger can be influenced by a variety of factors, including increased profitability and a relatively low initial price, in addition to sharply increasing sales.
Regarding the first issue, the research reveals that 10-bagger equities are actually initially successful companies, which may come as a great shock. We sometimes assume that these victors are forgoing present earnings in order to achieve expansion, but this isn’t the case. In actuality, 10-baggers’ operating margins grow with time.
Additionally, given these companies have profitable bottom lines, we may evaluate them based on their price to earnings (P/E) ratio.
Fast top-line growth, expanding profitability, and a greater valuation are all necessary components for a company to become a 10-bagger.
While it might be quite simple to spot businesses that have expanded their sales and profits quickly in the past, it can be difficult to forecast whether they will be able to maintain such gains in the future.
However, investors are now more knowledgeable about the qualities to look for in winning stocks.