Peter Lynch called them “ten baggers.” It’s a stock that can go up in value by ten times, for example from $9 to $90 a share. These stocks are obviously difficult to find but in the past, they have shared certain characteristics. Spotting these characteristics just might help us uncover the future ten baggers.
To begin with, a ten bagger will have to be a small company. We know that because it is just impossible for some stocks to increase in value by ten times. Take Apple (Nasdaq: AAPL), as an example. With a market cap of more than $800 billion, Apple would need to become an $8 trillion company to be a ten bagger.
It seems unlikely that Apple can grow that much. In the current global economy, it seems unlikely any company can be an $8 trillion company. It seems safe to say that in a hunt for a ten bagger, we should look at smaller companies.
Other Characteristics of Ten Baggers
In the hunt for big winners, many investors will look for the next Apple or the Microsoft (Nasdaq: MSFT). Their bias may drive them towards tech stocks. But, there is no rule that tech stocks can be the only big winners in the stock market.
One of the biggest winners in the past twenty years has been a soft drink company, Monster Beverage Corporation (Nasdaq: MNST). This stock has been a “540 bagger” so far.
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Now, Monster is a $30 billion company and is still capable of being a ten bagger. But, it’s not a tech stock. The company’s current focus is on energy drinks. It began trading as Hansen’s Natural Soda and focused on high quality sodas.
Another big winner has been Deckers Outdoor Corporation (NYSE: DECK). This stock has been a 107 bagger.
Deckers is a shoe maker. Its brands include UGG, Teva and Sanuk. UGG has been the brand responsible for the large gains in the stock price. This is a far step from the tech world and demonstrates that all that is required for a company to succeed is a product that people are willing to pay for.
Future ten baggers have a history of sales. They may not have earnings but sales are a quantitative measure of demand for a product.
These companies also have positive cash flow. Again, they may not have earnings but cash flow is the more important metric on the balance sheet. In any successful company, management’s job is primarily to allocate cash flow.
Cash flow is required to fuel a company’s growth or to reward share holders. When cash flow is positive, management must decide whether or not to reinvest in the business, make acquisitions to increase revenue and earnings or reward share holders with dividends and buybacks.
These characteristics are the minimum requirements for a potential ten baggers:
- A relatively small market cap
- A history of generating revenue
- Positive cash flow
- A stock price that is going up
That last characteristic may sound almost silly in a way. Of course, we want to buy stocks that go up. But, we are referring to momentum. This means waiting for the stock price to go up before buying. A stock that is going up will have upward momentum and that upward momentum is the trigger for a buy signal.
Screening for Trade Candidates
We can add those characteristics to a screen at FinViz.com. The specific criteria we selected are shown below.
Our search identified five liquid stocks that are buy candidates.
Antares Pharma, Inc. (Nasdaq: ATRS) is a pharmaceutical company that has developed three proprietary platforms, two of which now include FDA approved products. The company focuses on self-injection pharmaceutical products and technologies and topical gel -based products. Its subcutaneous injection technology platforms include Vibex™ disposable pressure-assisted auto injectors, Vision® reusable needle-free injectors, and disposable multi-use pen injectors. The company has strategic alliances and partnership arrangements with Teva Pharmaceutical Industries, Ltd.; AMAG Pharmaceuticals, Inc.; Ferring Pharmaceuticals Inc.; and Ferring B.V.
Analysts have a price target of $4.66 on ATRS, indicating this stock could gain more than 50% from its current level.
BioDelivery Sciences International, Inc. (Nasdaq: BDSI) is a specialty pharmaceutical company that focuses on the development and commercialization of pain management and addiction related products. The company provides its products based on its patented BioErodible MucoAdhesive (BEMA) drug delivery technology, which consists of a small, erodible polymer film for application to the buccal mucosa. It offers ONSOLIS, a fentanyl buccal soluble film to treat breakthrough pain in opioid patients with cancer; BUNAVAIL, a buprenorphine and naloxone buccal film for the treatment of opioid dependence; and BELBUCA, a buprenorphine buccal film for the treatment of chronic pain. The company also develops Buprenorphine Depot Injection, an injectable microparticle formulation of buprenorphine for the treatment of opioid dependence and chronic pain. It has a licensing and development agreement with Endo Pharmaceuticals, Inc.; Evonik Corporation; Collegium Pharmaceutical, Inc.; and Meda AB. BioDelivery Sciences International.
The analysts’ price target of $4.50 indicates this stock has the potential to gain about 35%.
Calumet Specialty Products Partners, L.P. (Nasdaq: CLMT) produces and sells specialty hydrocarbon products in North America. The company operates in three segments: Specialty Products, Fuel Products, and Oilfield Services. The Specialty Products segment offers various lubricating oils, white mineral oils, petrolatums, solvents, waxes, synthetic lubricants, and other products which are used primarily as raw material components for basic automotive, industrial, and consumer goods. The Fuel Products segment provides fuel and fuel-related products, including gasoline, diesel, jet fuel, asphalt, and heavy fuel oils, as well as resells purchased crude oil to third party customers. The Oilfield Services segment manufactures and markets drilling fluids, completion fluids, and solids control services to the oil and gas exploration industry.
This stock is trading near the analysts’ price target of $6.83. This indicates there could be better buy candidates. The fact that analysts believe this is fully valued demonstrates why screens are used as a starting point by many traders, rather than a complete strategy.
Taseko Mines Limited (NYSE: TGB) is a mining company that acquires, develops, and operates mineral properties in Canada and the United States. The company explores for copper, molybdenum, gold, niobium, and silver deposits. It holds a 75% interest in the Gibraltar copper mine located in central British Columbia. The company also has interests in the Aley niobium, Harmony gold, and New Prosperity gold-copper projects situated in British Columbia; and the Florence copper project located in central Arizona.
Xplore Technologies Corp. (Nasdaq: XPLR) develops, integrates, and markets rugged mobile personal computer systems in the United States, Canada, and internationally. It serves public safety, utility, telecommunications, field service, warehousing logistics, transportation, oil and gas production, manufacturing, route delivery, military, and homeland security markets. The company’s products enable the extension of traditional computing systems to a range of field personnel, including energy pipeline inspectors, public safety personnel, warehouse workers, and pharmaceutical scientists. It offers a line of iX104 tablet PCs that are designed to operate in various work environments, such as extreme temperatures, constant vibrations, rain, and blowing dirt and dusty conditions.
This stock is trading above the analysts’ price target of $1.46.
YuMe, Inc. (NYSE: YUME) provides digital video brand advertising solutions in the United States and internationally. The company offers software to monetize professionally-produced content and applications for digital media properties. In addition, the company enables digital video advertising by matching relevant audiences available through its digital media property partners with appropriate advertising campaigns from its advertising customers.
This stock is also trading above the analysts’ price target of $3.50.
Even though several of these stocks are above the analysts’ price target, any or all of these stocks are potential buys. In the long run, they all have the potential to deliver large gains. Over time, they could be ten baggers but that level of returns will most likely take years to achieve.