In a previous article, I outlined three characteristics that I think investors should look for in their hunt to find multibagger stocks. To recap:
- Mass appeal -- A product with overwhelming popularity, either with a large group, or a product with a small but dedicated following that is likely to catch on with the masses.
- Growth potential -- Popularity isn't enough. The company must have growth opportunities through new markets (abroad or at home), new products, or by gaining market share or simply being part of a rapidly growing market (such as smartphones over the last five years).
- Size -- Related to No. 2, we want to find companies that are just on the cusp of breakout growth. A market cap around $1 billion would seem to be the ideal target here, as a $1 billion company is big enough to have proven itself but small enough to still expand several times over.
Looking back, I think Apple (Nasdaq: AAPL ) 10 years ago offered a perfect example of these attributes at a time when the iPod and iTunes were first becoming immensely popular. Those products led to the iPhone and iPad, and shares of the company are now worth nearly 100 times what they were in 2003.
While we may not be able to find the next Apple, I've chosen a few companies below that I believe could become 10-baggers. Let's take a look:
1. SodaStream International (Nasdaq: SODA ) : Shares of the maker of the countertop soda machine and its flavoring and CO2 consumables have been stuck near the $35-$40 range over the past year despite a phenomenal growth rate. Sixty percent of its shares are sold short, which may explain why the stock has been unable to break out, as many investors believe the product is just a fad.
The facts, however, seem to indicate that SodaStream is here to stay. Out of more than 400 reviews on Amazon.com, the starter kit received five stars from more than half of reviewers, along with an average rating of 3.9. Of course there are some disgruntled buyers, but the company expects an attrition rate of 10%-15% on base system sales. SodaStream is no fly-by-night enterprise, either. Founded in 1991, the company has established a strong foothold in Europe, gaining as much as 20% market penetration in Sweden, and is expanding into Latin America and Asia, as well as building on its initial push in the U.S.
The growth opportunities seem clear here for SodaStream, not just by entering new markets, but also by increasing its retail presence. Wal-Mart recently agreed to sell SodaStream's products, and once the soda maker finds its way into supermarkets, sales should soar.
With a market cap of $835 million, there's plenty of room for this stock to multiply. Earnings grew by about 50% last quarter, but the stock has a forward P/E of just 14. Despite what the shorts think, it's easy to see shares shooting through the roof over the next five years.
2. Cirrus Logic (Nasdaq: CRUS ) : This call may be coming a bit late, as Cirrus shares have already tripled this year, and it has actually been a 10-bagger for investors who bought in 2009, but I think there's plenty more room for growth. Best known as the provider of audio chips for Apple products, Cirrus is a great way to play Apple's rocketing sales growth through a small company whose share price could easily double or triple. The stock has shot up 50% just in the last six weeks as excitement over the iPhone 5 has built.
Looking ahead, Cirrus' fortunes may rest on iPhone 5 sales in the near future and on the continued strength of Apple products in the long-term, but the company is also making attempts to diversify as 70% of revenues come from Apple. It's now focusing on chips that allow LED light bulbs to dim, which is expected to be an $11.5 billion market by 2013.
A glance at Cirrus' fundamentals paints a similar picture to SodaStream. Analysts expect a 58% increase in revenue, but shares trade at a forward P/E of just 14. At a market cap of $2.7 billion, it's bigger than I'd like, but if growth in LED lights and Apple products keeps up, then Cirrus should hit a few more doubles before it slows down.
3. 3D Systems (NYSE: DDD ) : As with Cirrus, this call may be coming a little late, as shares of the 3-D printer have nearly tripled since the beginning of the year, but with a groundbreaking technology such as this one, it's easy to imagine continued growth for years ahead. Even the unveiling of the new iPhone seems to be a boon for 3D Systems, as it's released its own cases for the smartphone under the FreshFiber label. Other applications for the technology include jewelry, toys, prosthetics, orthodontics, and vehicle parts.
Analysts continue to debate the potential penetration of 3-D printers, whether they will ever become a household device the way 2D printers have, and whether these products will ultimately become a commodity the way printer ink can be bought from OEM producers.
The 3-D printing industry still seems to be in the early phase of its growth cycle, and 3D Systems has partnered with schools from the elementary level to universities to show the next generation the wide range of applications for this new technology as well as develop new ones.
The stock's recent run-up may have been overdone as shares have since faded, off about 15% from a recent peak, but it still sports a lofty P/E of 66. At a market cap of $2.1 billion, it's a bit larger than our target of $1 billion, but this is a long-term growth story and the potential of this industry is too big deny. If 3-D printing truly takes off, there is still 10-bagger potential here.
4. Pandora Media (NYSE: P ) : This pick is surely riskier than the others, since the Internet DJ has struggled to turn a profit and been panned by a range of critics in the process. Though the company's revenue is growing briskly, content acquisition costs have outpaced sales, a problem that needs to be solved before Pandora can become a solid investment. A bill in Congress attempting to equalize royalty rates across channels could take a step in that direction, and the company's push into local advertising should also boost the top line.
Leaving that issue aside for now, it's hard to deny the popularity of the product. The number of active listeners climbed about 50% to 56.2 million in August, and listener hours grew 70% to 1.16 billion hours. Pandora still has only a 6.3% market share in radio, which is sure to grow as it finds its way onto more car dashboards.
Like many of the companies we looked at in my introductory article, Pandora and its Internet radio brethren such as Spotify represent a disruptive innovation. They simply offer a better service than the traditional provider, in this case broadcast radio. With its customizable stations, Pandora essentially offers its listeners an infinite number of possibilities, and since the company only operates in the U.S. right now, if it can get the business model straightened out, worldwide expansion could potentially bring it billions of other listeners that can be monetized.
Considering that rival Sirius XM has a market cap of $9.5 billion, it doesn't seem unreasonable to expect Pandora, which is currently valued at $1.8 billion, to one day reach that mark. If it can resolve its issues, it could shoot even higher.
All of the four stocks above make popular products, have huge growth potential, and are small enough to multiply many times over. Add them to your Watchlist to follow their growth.
Also, Apple may not have a 10-bagger left in it now, but it's still a compelling stock, and with the iPhone 5 just debuting this week, information on Apple is as valuable as ever. Find out everything you should know in the Fool's premium report on Apple. It contains a detailed analysis on Apple's opportunities and risks, as well as key areas that investors should watch. Best of all, it comes with a year's worth of updates, so you'll have the hard work of parsing through earnings reports and other breaking news handled for you. To check it out now, just click right here.
Got your eye on a 10-bagger I didn't mention? Sound off in the comments section below.