A 20-Bagger in Six Years

The headline seems preposterous.

Pure substanceless hype.

Prattle. Nonsense. Cheese.

Can anyone really earn 20 times his or her money in just six years? That computes to an annual return of 64% per year, turning a $50,000 investment into $1 million by 2012. It strikes veteran investors as unfathomable.

But turn back the clock six years to December 2000, and observe Urban Outfitters, then valued at $140 million. Today, it's worth $3.8 billion. It's come down this year -- the stock had actually risen more than 25 times(!) in value in less than five years, as of this January -- but even after nearly being cut in half earlier this year, it's rebounded again to being a "mere" 23-bagger.

The question is: How could you have found it back then?

Finding great returns
Well, it would have been extremely difficult, had you not been intentionally trying to unearth the next small-cap winner. We embrace that challenge with our thousands of contributing members every day in Motley Fool Hidden Gems, because logic and history demonstrate that the major winners of tomorrow are companies capitalized at less than $2 billion today.

So what was so special about Urban Outfitters in 2000 that we actively screen for in Hidden Gems now? Among other things:

  1. Solid financials.
  2. A non-dilutive board.
  3. Founding leaders with major ownership stakes.

Back then, Urban Outfitters featured double-digit sales growth, $16 million in cash, and no debt. Rather than printing stock options like free lottery tickets, the board of directors was buying back stock. The company's two founders -- Richard Hayne and Scott Belair -- were (and are) engaged as board members. Thirty years after starting the business, they had a major incentive to drive the company. Together, they owned more than 45% of the business. Their combined stock holdings were worth $77 million in 2000. Today, they still own more than 32% of Urban Outfitters' stock.

Other companies that have fit this mold in the past are Charles Schwab (Nasdaq: SCHW  ) , Kinder Morgan (NYSE: KMI  ) , and Getty Images (NYSE: GYI  ) , as well as Coldwater Creek (Nasdaq: CWTR  ) , Seaboard (AMEX: SEB  ) , and eBay.

Fool's final word
These factors -- solid financials, a non-dilutive board, and founding leaders with major ownership stakes -- are some of the core variables we screen for in Hidden Gems. From there, we carry out qualitative research with our thousands of members. To go beyond the quantitative screen, you have to do qualitative research to learn that back in 2000, Urban Outfitters was powering up its expansion of Anthropologie stores with great success.

All the way to a 20-bagger.

We are constantly looking for today's greatest small caps in Hidden Gems. Take a free trial, read through our more than 40 active recommendations, and do so with no obligation to subscribe.

This article was originally published as "A 25-Bagger in Five Years" on Dec. 22, 2005. It has been updated.

Fool co-founder and Hidden Gems lead analyst Tom Gardner does not own shares of any company mentioned in this article. eBay and Schwab are Stock Advisor recommendations. The Motley Fool has adisclosure policy.


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