3 Home Run Stocks for the Next Decade

My friend's father has the kind of story you see in the movies. He invested his first real estate commission in Microsoft back in the early '90s, when the stock was trading for less than $10 a pop, and cashed in his lottery ticket before the bubble burst in 2000.

I tried to pick his brain for stock picks, but by now, he's content collecting dividend checks and living the good life. I came away from the conversation wanting more than anything to find the next Microsoft -- the stock that could secure my financial future the way it did his.

It only takes one great stock
In investing as in baseball, just one home run can completely change the game. You may own five or 10 stocks that provide average or even negative returns -- but if you manage to find that one diamond in the rough, you can more than compensate for anything else your portfolio serves up.

David Gardner, co-founder of The Motley Fool and advisor for our Rule Breakers service, is a great advocate of finding out-of-this-world stocks. He doesn't always worry about price-to-earnings ratios or margins of safety. Instead, he looks for companies that are totally changing the industries in which they compete.

He'd be the first to admit that not all of his picks turn out the way he'd like -- there are definitely some laggards in the Rule Breakers portfolio -- but then there's a company like Intuitive Surgical (Nasdaq: ISRG  ) . David has recommended Intuitive four times, and it's up more than 700% from his original recommendation. Intuitive Surgical is a great company, and it's expected to grow earnings by 25% over the next five years. Although it's now a $14 billion mid-cap, it still has plenty of room to run -- but think about what a great return you would have seen had you gotten involved with Intuitive when it was still a small company getting ready to roar.

Getting the perfect pitch
Peter Lynch, known for telling investors to invest in what they know, acknowledged the power of fast-growing companies. He said high-growth stocks were "among my favorite investments: small, aggressive new enterprises that grow at 20%-25% a year." Of course, these types of stocks can be risky, but Lynch recognized that "one or two of these can make a career."

If you could identify some of the characteristics of home run stocks right before they took off, surely you'd have a much better chance at finding stocks for the next decade. Let's look at some of the market's recent darlings, and see how they stacked up in some key metrics in the year or so prior to their surge in share price:

Company

Prior-Year Return on Equity

Prior Year Revenue Growth

Prior Year Net Income Growth

Netflix (Nasdaq: NFLX  )

21.4%

13.2%

24.6%

NVIDIA (Nasdaq: NVDA  )

22.2%

18.2%

239.9%

Baidu (Nasdaq: BIDU  )

41%

83.3%

66.6%

As you can see, these companies not only grew their revenue and earnings at tremendous rates, but also generated strong returns on equity -- a great sign of management's ability to allocate capital. It's no coincidence that stocks have each seen multibagger gains since the year prior to their takeoff.

In addition, these are all companies that have managed to stay ahead of the curve. Baidu, for example, has been helped with its massive market share in China and its ability to stay in the government's good graces. Netflix is making a smooth transition from a mail-order DVD company to a comprehensive online streaming service. These are all home run companies of the past that continue to deliver, and will most likely outperform in the future as well.

Sluggers for the next 10 years
Now equipped with some guidelines on my hunt for the next big stock, I ran several screens looking for companies with similar qualities. It's important to note, however, that you have to find them before everyone else does, which often means finding them while they're still small and unknown. In addition, I felt it was necessary to search for companies with strong insider ownership. When the execs have their own money on the line, they're more likely to act in shareholders' best interest.

That being said, let's see which three companies made the list for the next decade:

Company

Market Cap

Prior Year Return-on-equity

Prior Year Revenue Growth

Prior Year Net Income Growth

Health Grades (Nasdaq: HGRD  )

$191 M

42%

28.1%

42.7%

ClickSoftware Technologies (Nasdaq: CKSW  )

$201 M

36.4%

17%

54.3%

Lumber Liquidators (NYSE: LL  )

$828 M

20.5%

12.9%

21.6%

Each of these companies has the essential attributes of a potentially earth-shattering stock: small market caps, fantastic revenue growth, bottom-line profits, and fabulous returns on equity. In addition, they all have inside ownership of at least 16% -- a comforting factor when considering your next big purchase.

Lumber Liquidators is a great place to start your research. This small-cap has 9% market share in the hardwood flooring segment -- which may not sound like a lot, but it's by far the most in the industry. It's also large enough to help Lumber generate about $545 million in annual sales. The company has been on a expansion spree, doubling the number of stores in the past three years, and who can blame them? The average store costs $280,000 to open, but typically rakes in about $3.8 million a year. With huge upside, absolutely no debt, and endless economies of scale, Lumber is bound to see a huge bounce in its stock price -- and our Rule Breakers analysts think it's only a matter of time.

So if you're looking for the next Baidu or Netflix, Rule Breakers is a great place to start. David Gardner has an amazing track record (he and his team have beaten the market by 27% since inception in 2004), and he consistently finds stocks that can take your portfolio to the next level.

Fortunately, right now, you can see all of his past and present recommendations. We're currently offering a free, 30-day trial to the service -- no strings attached. Click here for more information.

Already a subscriber? Log in at the top of the page.

Fool contributor Jordan DiPietro owns no companies mentioned in this article. Microsoft is an Inside Value pick. Baidu, Intuitive Surgical, and Lumber Liquidators Holdings are Motley Fool Rule Breakers selections. Netflix and NVIDIA are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool's disclosure policy is always looking for the next big stock.


Read/Post Comments (11) | Recommend This Article (97)

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 April 27, 2010, at 2:09 PM, Midlana wrote:

    I like how two NFLX articles are posted within minutes of each other, one saying the stock will continue to be a big success, while the other suggests it's time to get out. Nice way to always be "right"...

  • Report this Comment On April 27, 2010, at 2:10 PM, Midlana wrote:

    The article saying we should consider bailing on NFLX is here: http://www.fool.com/investing/general/2010/04/27/2-star-stoc...

  • Report this Comment On April 27, 2010, at 4:00 PM, TMFPhillyDot wrote:

    @Midlana,

    The great thing about the Fool is that there are many different writers and analysts, and we all have varying opinions and viewpoints.

    Personally, I think diversity of thought is more important than having one general opinion.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On April 27, 2010, at 6:29 PM, brow0905 wrote:

    Jordan,

    Ignore haters like @Midlana. They love to come here and see current Rule Breakers and Stock Advisor selections for free but complain when it's not completely black and white.

    I personally own Netflix, have since it was trading for under $20 a share and am not going anywhere (did take 25% profit for other stocks that are undervalued but staying in long haul).

    I found it interesting you pointed to LL when their CAPS rating is 3 stars, the other are 5. From your perspective which of these represent the best value?

    Fool on brother,

    Justin

  • Report this Comment On April 27, 2010, at 7:05 PM, DivMonk wrote:

    "It's also large enough to help Lumber generate about $545 billion in annual sales."

    Typo: million, not billion

  • Report this Comment On April 27, 2010, at 7:15 PM, TMFPhillyDot wrote:

    @R3quiem,

    Good catch -- you're right, it should be "$545 million in annual sales. We'll get that fixed asap.

    Thanks,

    Jordan (TMFPhillyDot)

  • Report this Comment On April 27, 2010, at 7:15 PM, TMFPhillyDot wrote:

    @R3quiem,

    Good catch -- you're right, it should be "$545 million in annual sales. We'll get that fixed asap.

    Thanks,

    Jordan (TMFPhillyDot)

  • Report this Comment On April 27, 2010, at 7:22 PM, TMFPhillyDot wrote:

    @brow0905,

    Thanks for the comment!

    It's really hard to say which is a better value -- all three are growth companies and are priced accordingly. However, I really like HGRD and think that with respect to their growth, they are priced pretty reasonably. And today they went down about 5.5% -- in my opinion, even though their earnings report was positive.

    But as always, we urge you to do your own due diligence and see what you come up with.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On April 28, 2010, at 8:49 AM, ziq wrote:

    I'm with brow0905. I did sell some shares of NFLX to rebalance and allocate elsewhere, but it's still one of my biggest holdings. I'm not going anywhere with it any time soon. A genuine "rule breaker".

  • Report this Comment On April 28, 2010, at 1:25 PM, brow0905 wrote:

    Ziq - bingo buddy. With the Wii deal it opens the door for so many additional customers to Netflix and they'll only continue to kill it for the next few years. I could see a day when the street tires of this growth story but NFLX is far from over...

    Thanks Jordan for your response. It's interesting your comments, I would have said CKSW given the PE, market it's in, and some of the numbers on the ballance sheet (love the way the growth story is playing against it's competitors). That's why I asked though, everyone see's a little something different in the analysis of an equity.

    I do like HGRD initially but I'd have to do more research. It seems like there's a lot of opportunity there with efficiencies that will be realized in Healthcare savings over the next few years but friends of mine have been touting any number of Healthcare stocks for the past few years. Healthways HWAY is another I keep hearing about, similar niche but a bit different in I believe they work w/ companies to help get employee's fitter/healthier (not totally sure). Bottom line is there are ways to play that vertical market, especially on the small cap side but I have yet to figure it out enough.

  • Report this Comment On May 11, 2014, at 11:38 PM, rcacowboy wrote:

    Health Grades, Inc. I can not find the symbol for this stock. HGRD does not work.

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