Which Stocks Will Be 2020's 10-Baggers?

Pop quiz, hot shot. Name the company that's most likely to be a 10-bagger by 2020.

It's a hard question. There isn't just one correct answer -- you can find three candidates here -- but it's easy to weed out some popular incorrect answers. 

If you named Cisco (Nasdaq: CSCO  ) , Johnson & Johnson (NYSE: JNJ  ) , Kentaco Fried Hut parent Yum! Brands (NYSE: YUM  ) , or any other large-cap company, you're probably wrong. They're simply too big to grow tenfold in the next decade. My Foolish colleague Tim Hanson has shown year in and year out that a decade's biggest winners are small-cap stocks.

He found that the largest grower of the last 10 years, beverage company Hansen Natural, was almost a 50-bagger. Even at 50 times its original market capitalization, Hansen is a $3 billion company -- one-fifth the size of Yum Brands, a fortieth the size of Cisco, and a fiftieth the size of Johnson & Johnson.

It gets better
Besides having room to grow, small caps have another hidden feature. They are more volatile than their large-cap brethren. This can lead to fluctuations that are absolutely heartbreaking for investors with low risk tolerances. But for those of us with higher risk tolerance, the volatility provides opportunity.

As we've seen recently, large-cap stocks can be quite volatile, too. When their price losses significantly outstrip the market's, though, there's usually something terribly amiss.

Familiar examples abound. Take the gambling industry and former large caps MGM Grand (NYSE: MGM  ) , Las Vegas Sands (NYSE: LVS  ) , and Wynn (Nasdaq: WYNN  ) . If they recover, each could be a multibagger from here. However, they're all priced at fractions of their former highs because their balance sheets weren’t built for a gambling environment crippled by a faltering economy.

Meanwhile, small caps are a little different. Sometimes, as in the case with Boyd Gaming (NYSE: BYD  ) , small caps are down for a reason. But, since they tend to have greater volatility than the market as a whole, sometimes they experience dramatic stock price tumbles on very little news. Or even on relatively good news.

A quick example
Take the recent case of restaurant company Buffalo Wild Wings. Back in late October, it reported quarterly earnings that were disappointing. But given the state of the economy in general and the restaurant sector specifically, the results were downright robust: positive earnings-per-share growth and impressive same-store sales growth (6.8% at company-owned stores).

In response, shares were sliced in half in the month following the earnings release ... only to gain it all back and then some after the company beat analyst expectations in the subsequent quarter. Over the past few months, it's been the same company with the same long-term prospects. There have been no huge company-related events, and its price is about the same now as it was a year ago.

But somewhere in the middle, the market threw a half-off sale for investors patient enough to wait for a discounted entry point. Since they took advantage of volatility, those investors need only a five-bagger from here to reach the vaunted 10-bagger status.

The 10-bagger club
In 2020, when we look back at the decade's list of 10-baggers, the list will be dominated by stocks that can be described as:

  • Small
  • Volatile

The list of investors who profit from these 10-baggers will be dominated by people who can be described as:

  • Patient
  • Risk-tolerant

If you have these two qualities, I invite you to join our analysts at the Motley Fool Hidden Gems newsletter. They are putting the Fool's money where its mouth is by building a real-money portfolio of small-cap stocks. You can see all the companies they're investing in with a free 30-day trial. If you're not impressed, there's no obligation to subscribe.

Already subscribed to Hidden Gems? Log in here.

This article was originally published on May 15, 2009. It has been updated.

Anand Chokkavelu does not own shares in any company mentioned. Johnson & Johnson is a Motley Fool Income Investor pick. Hansen Naturals is a Rule Breakers choice. Buffalo Wild Wings is a Hidden Gems recommendation. The Motley Fool owns shares of Buffalo Wild Wings and has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (6)

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, 2009, at 8:44 AM, oilspiller wrote:

    So, if I read this right, this article is saying that MGM could be a 10 bagger?

    The article suggests that "their balance sheets weren’t built for a gambling environment crippled by a faltering economy".

    This would indicate the opposite to me.

    Particularly when later in the article it reads:

    "the list (of 10 baggers) will be dominated by stocks that can be described as:

    •Small

    •Volatile "

    The "small" description certainly wouldn't include MGM !

  • Report this Comment On July 22, 2009, at 12:12 PM, spokanimal wrote:

    You are right the Wynn and Las Vegas Sands have

    "balance sheets weren’t built for a gambling environment crippled by a faltering economy".

    Problem is, 60% of Wynn's revenues and 70% of Las Vegas Sands revenues come from Macau and China's GDP just surged to 7.9%.

    Singapore, where LVS will arguably have it's most vibrant venue starting next february, is also seeing a substantial economic turnaround.

    When is Motley Fool going to become fully aware that we are in a global economy and that many of these companies are multinational... yet your articles remain so U.S. focused... and thus so mis-leading.

    Spok

  • Report this Comment On July 22, 2009, at 12:14 PM, CurryM0nster wrote:

    The Author says that there are large cap stocks with "multi bag" growth potential. Though those stocks are that way because of terrible balance sheets due to the poor economy. His point is that many small caps can have good balance sheets and still be able to provide multi bag growth.

  • Report this Comment On July 23, 2009, at 12:57 PM, multi007 wrote:

    Reply: Spolanimal

    I dont believe MGM has multinational coverage, but I could be wrong. They may in the future, but not as of now. I thought they are only domestic.?

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