7 Tips for Finding the Next Massive Home-Run Stock

"The past does not repeat itself, but it rhymes."
-- Mark Twain

I'm with the good Mr. Twain on this one. While the past may not be a perfect model for the future, there's a heck of a lot we can learn by being students of the past. This is definitely true when it comes to investing.

With this in mind, I sat down with a nice, big mug of coffee and a list of the top performing stocks with a market cap of $250 million or more over the past 10 years to see if I could pull out some helpful hints for those looking to bag the next decade's monster stocks.

Before I start, though, let me be clear about one thing: These are not meant to be safe, conservative investment tips. While many of these can be adapted to a conservative strategy, I wrote them with big swings in mind. Picture mighty Casey taking powerful hacks at the ball -- if he connects, that ball may end up in the next state, but there's also the very real possibility that he strikes out.

1. Be at the front end of a massive trend
Many of the best performing stocks of any time period are part of some massive trend that carries an entire industry or multiple industries. The bubble notwithstanding, investors that have been in on the best of the computer- and Internet-related businesses over the past couple of decades have done quite well.

More recently, we've seen a major boom in commodities. One particularly notable area has been in crop nutrients. This helped Sociedad Quimica y Minera (NYSE: SQM  ) stock to a near 3,800% gain and PotashCorp's (NYSE: POT  ) to multiply nearly 18 times.

While there may still be some juice left in the fertilizer run, the really massive gains have likely already been banked. However, investors that can see the next massive trend and get on it early (and hang on!) could put themselves in line for tremendous returns.

2. Look where others aren't
Between July 2001 and July of this year, Bancolombia (NYSE: CIB  ) provided investors with a total return of 3,591%. Where was this world-beater hiding? It was right in plain sight if you were looking in the right place. For the full year 2001, Bancolombia's return on equity was 17%. Meanwhile, the stock traded at an average book value multiple of 0.66 and an average price-to-earnings multiple of 3.4.

But who was talking about Colombia back in 2001? Heck, who's talking about Colombia today? If you look in places that other investors aren't, you stand a much better chance of finding great bargains.

3. Find a winning strategy and management capable of delivering
To some extent, you would have had to predict the future to really know the massive success that Apple (Nasdaq: AAPL  ) would be from that point forward. In the middle of 2001, the company hadn't even announced the iPod, which was the jumping-off point for today's iEmpire.

However, by the end of 2001, it had launched the iPod and was talking about its "digital hub" strategy that would seamlessly tie digital music and other peripheral devices to the PC. While big ideas like that may often be of limited value on their own, Apple was captained by Steve Jobs who had the vision, creativity, and leadership to actually make it happen.

To be sure, great management or not, companies with grand visions don't always deliver. But if you find a company with both -- vision and leadership -- then there's a much better chance for a big homerun.

4. Look small
If you want really massive returns, it's unlikely that you're going to find them among mega-cap or even large-cap companies. Among the top 10 performers of the past decade, Apple was the largest with a market cap of $8.1 billion in July 2001. Seven of the top 10 performers had market caps below $1 billion.

5. Believe in dividends
BP Prudhoe Bay Royalty Trust
(NYSE: BPT  ) has been a very good performer. The stock price has climbed 787% over our 10-year stretch. Add in the returns that investors have gotten from BP Prudhoe's generous dividends, though -- it was paying a 23% trailing dividend in mid-2001 -- and suddenly you're looking at a gargantuan 2,414% return.

Interest in dividends has seen a renaissance of late, and I hope that continues because a solid dividend policy can juice returns in a major way.

6. Be willing to pay for growth
As painful as this is for a value investor like me to say, if you want to be in on some of the absolute best performing stocks, you may have to pay what looks like a high price.

Cognizant Technology Solutions (Nasdaq: CTSH  ) has never been a cheap stock on the basis of trading multiples, and back in 2001 it traded at an average P/E ratio of 41 (its P/E is just short of 30 today). Anyone that thought that was too pricey would have missed out on tremendous growth from the company and a 2,000%-plus return from the stock.

7. Buy ugly and get lucky
For anyone that bought Netease's (Nasdaq: NTES  ) stock in mid-2001, it's seems that a little luck can go a long way. Following the dot-com bust, Netease was a mess. Like many other businesses that relied on advertising for revenue, when the bottom fell out, its business went splat.

In mid-2001, the stock had fallen hard and may have looked cheap, but the company was working on what would be a hefty loss for the year and it hadn't quite figured out what would be its way out of the mud -- at the time it was trying out a whole mess of fee-based, Internet-related services.

To be sure, there was still money to be made after the company had found that a good business could be made offering massively multiplayer online role-playing games -- Rule Breakers subscribers have seen shares climb nearly 275% since the early-2005 recommendation. But while that may sound good, the stock has returned close to 14,000% since July 2001.

And to get those returns? Well, let's just say sometimes Lady Luck may have a lot to do with it.

Get started
You can kick off your search by exploring a major trend (remember No. 1?) that my fellow Fools think will scare the pocket protector right off of Bill Gates. Dive in with this free video.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Netease, Sociedad Quimica y Minera, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (17) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2011, at 3:43 PM, Gonzhouse wrote:

    Another add for crop nutrients: CVR Partners (UAN). Read the write-ups; it has winner written all over it.

  • Report this Comment On July 22, 2011, at 4:14 PM, TMFRhino wrote:

    Enough about all these stocks, how was the nice big cup of coffee?

  • Report this Comment On July 22, 2011, at 4:17 PM, TMFKopp wrote:

    @TMFRhino

    It was really great - it was a light Central American roast brewed in a French press. Speaking of... Probably time for some more. Mmmmmmm.

    Matt

  • Report this Comment On July 22, 2011, at 5:28 PM, Stoqinvestor wrote:

    I think value-investors are really overlooking the significance of paying for growth and quality. In my analysis (www.discountedflow) I mainly focus on the value aspect of investing (buying stocks for a bargain). However I believe that great stocks almost never come as a bargain.

  • Report this Comment On July 22, 2011, at 6:00 PM, David369 wrote:

    Really luck is a big part combined with the imagination and social awareness of seeing the potential. Well, maybe a lot of luck. When NFLX first started there were probably 6-8 investors saying it will never work to the ones that invested. The rest were scratching their heads saying who the heck would want DVDs by mail when there are Blockbusters all over the place?

    Apple had a loyal following of MAC users. I know how user friendly MACs were. In the mid 90's I had a job where I had three computers on my desk. A regular PC, a Unisys system and a MAC. The MAC would spoil you it was so user friendly. I hated dealing with glitches on the Windows. I think the only reason we aren't using MACs to the extent of Windows was due to S. Jobs not facilitating more programs for Apple products by keeping too much "control".

    Look at GMCR, still growing. I would never have guessed people would pay so much for coffee or that it would beat out the other similar products like Tasso coffee makers.

    Now I see ZIP, SODA, KNOT, OPEN and a host of other kind of new and different concepts. I wonder which ones will take off and which ones will not be around in 5 years? I feel like I'm at a roulette table....

  • Report this Comment On July 22, 2011, at 10:42 PM, jagec3 wrote:

    What are some companies you found?

  • Report this Comment On July 22, 2011, at 11:48 PM, akeagle52 wrote:

    Take a look at UURAF, Ucore Rare Metals. It is at .75 per share. The company just happens to own the largest deposits of Rare Earth Elements in the United States. This stock may be a multi bagger in the next 3 to 5 years.

  • Report this Comment On July 23, 2011, at 12:06 AM, akeagle52 wrote:

    Heavy Rare Earth Elements are essential to computers, IPhones, IPads, electric cars (batteries), wind power, military hi tech weapons, etc etc. China has controlled 97% of the market of REEs and recently they have decided stop exporting REEs. The United States Gov. and several large companies have suddenly become very interested in REEs and the production/mining of REEs. Research it. sf

  • Report this Comment On July 23, 2011, at 2:36 PM, LQM2 wrote:

    I think tip number 5 is dead wrong and inconsistent with the others. You're not going to find the next "massive home run" stock being a small dividend payer. They're probably going to doing a series of secondaries to fund hypergrowth. This cult like love for dividends is becoming absurd.

  • Report this Comment On July 23, 2011, at 3:26 PM, David369 wrote:

    I agree with LQM2. Dividends are good for generally safe money (there are exceptions). But if you want significant growth I don't think those companies really pay dividends. You might get a good return over 5-6 years with a dividend stock but you sure aren't going to get a 1500% return in 5-6 years with any dividend stock that I know of.

  • Report this Comment On July 23, 2011, at 9:40 PM, wwwooozzz wrote:

    should have been titled: "stocks you missed"

    as for the future: how do ya'll feel about REITS? you can be honest, I can take it

  • Report this Comment On July 24, 2011, at 1:06 PM, TMFKopp wrote:

    @LQM2 and David369

    Did you actually read the text of #5? BP Prudhoe delivered massive returns *largely* from it's huge dividend.

    Matt

  • Report this Comment On July 25, 2011, at 10:38 AM, David369 wrote:

    @TMFKopp

    Yes that was 10 years and even that was an exceptional return for a dividend stock. Rare. I look for stocks like NFLX, ISGR, AAPL, AMZN. I do own some dividend stocks but not because of the dividend. COST is one and maybe COH does, not sure. I guess AAPL does but stocks like those I bought for growth and I don't think COST had a dividend when I bought it. In 10 years AAPL went from about 8 to around 400. That's pretty good growth for a company that certainly wasn't new or even all that different compared to MSFT 10 years ago (big dif now). What I regret missing out on and still ponder the value of investing in are stocks like CMG and GMCR.

    I consider dividends nice but it seems to me if the dividend is 2.5 percent and current inflation is about 2.5 percent. Well, that doesn't really mean much does it. Yes, reinvest the dividends.... Heck, just give me a good growth stock that doubles every year or better and I don't care about dividends.

  • Report this Comment On July 25, 2011, at 11:11 AM, TMFKopp wrote:

    @David369

    SQM paid a dividend for most of that period, CIB paid a dividend, SCCO paid a dividend, WLT paid a dividend, and, of course, BPT paid a dividend. That's 50% of the top ten performers over the past 10 years.

    Plus, as far as BPT goes, we're not talking about a 2.5% dividend. It was a massive, double-digit payout. Again, big swings here.

    In many cases, the fastest-growing companies won't pay dividends. It's not necessary that you follow every point on the list above at the same time -- instead, you can use one of the points or a few in conjunction. Apple, for instance, wasn't particularly small ten years ago and Bancolombia wasn't at the front end of a massive trend, but they had other items on the list going for them.

    Hope this clears things up.

    Matt

  • Report this Comment On July 25, 2011, at 1:35 PM, David369 wrote:

    @TMFKopp

    Thanks Matt. Yeah I saw the humongus dividend of BPT. There are still plenty of outrageous dividends out there and some of them with stocks that grow. Just not that many that grow that much or that I would want to trust.

    Of course you heard about the guy at MF who found the perfect way to tell if a stock was going to take off? He's the rich guy that doesn't work there anymore....

    If I could just find a good crystal ball....

  • Report this Comment On July 25, 2011, at 4:13 PM, N797T wrote:

    It seems apparent that the natural gas industry must have some winners.

    Unfortunately I have know experience in that industry.

    Anyone have any suggestions?

  • Report this Comment On July 25, 2011, at 10:07 PM, rqtballnut6870 wrote:

    @ N797T

    re: natural gas. You may want to investigate Marcellus Shale. Huge deposit in NY, PA, OH and WV. It extends over 575 miles with thickness of up to 900 ft. Info taken from the following website:

    http://www.oilshalegas.com/marcellusshale.html

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