Every investor dreams about owning the next home-run stock. However, identifying tomorrow's winners ahead of time is extremely difficult. To aid you in your search, we asked a team of Fools each to share a stock that they believe holds multibagger potential. Read on to see why they picked Skechers USA (SKX +0.00%), Omeros (OMER 3.98%), and Tile Shop Holdings (TTS +0.00%).
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Taking advantage of pessimism
Tim Green (Skechers): Footwear company Skechers isn't growing nearly as fast today as it was a couple years ago. Revenue grew by just 5.8% year over year during the fourth quarter, down from 26.8% growth during the fourth quarter of 2015. But a combination of a knocked-down stock price and international growth potential make Skechers a stock with plenty of room to soar in the coming years.
Skechers' main problem is its U.S. wholesale business. Revenue from that segment slumped 11.8% during the fourth quarter. The retail business did far better, with comparable sales growing by 3.6%. And the international wholesale business was firing on all cylinders, with revenue jumping 17.1%. Skechers' outlook for 2017 wasn't as dire as the market expected, with the company calling for flat to slightly positive sales in its domestic wholesale business, a major improvement.
Skechers stock trades for about 13 times the average analyst estimate for 2017 earnings. That's not no-brainer bargain territory, but the market seems to be underestimating Skechers' growth potential. The stock is still down 50% from its multiyear peak in 2015, and the company has a rock-solid balance sheet with barely any debt and hundreds of millions of dollars in excess cash. A buyback, or possibly a dividend, could be coming soon.
Skechers isn't the explosive growth stock it once was, but it's a great deal in an expensive market.
A rare combination
Brian Feroldi (Omeros): Investors who are willing to swing for the fences should consider buying a small-cap biotech stock that holds lots of growth potential. One stock that fits that description perfectly is Omeros, a commercial-stage biotech with an intriguing pipeline.
Unlike most small biotechs, Omeros already has a drug on the market that is producing revenue. Omeros has crossed the finish line with Omidria, a drug used during cataract surgery to keep a patient's pupils open and to reduce inflation after surgery. Sales of Omidria have been growing by triple digits since its launch, topping $11 million last quarter. Since tens of millions of patients in the U.S. alone have cataracts, Omidria looks poised for substantial growth in the years ahead.
However, the real reason to own Omeros is because of its pipeline compound OMS721. This drug is currently in mid- to late-stage studies as a potential treatment for five rare diseases. Included in its list of potential indications is an ultrarare disease called atypical hemolytic uremic syndrome, or aHUS, a life-threatening condition that is currently only treatable by Alexion Pharmaceuticals' multibillion-dollar drug Soliris. If OMS721 could find its way to market for this condition alone, it could potentially ring up hundreds of millions of dollars in sales. Given the four other potential indications for this compound, blockbuster sales potential isn't out of the question.
Between Omidra and OMS721, Omeros offers investors plenty of reasons to expect upside if everything works out. And yet this company's market cap is currently less than $500 million. That provides daring investors with plenty of potential upside if everything goes according to plan.
A specialist in a wide-open industry with huge room to grow
Jason Hall (Tile Shop): Tile Shop has turned the page in a big way under CEO Chris Homeister. Since taking over at the end of 2014, Homeister has completely revitalized the company by doing two surprising things:
- Slowing growth to pay down debt after years of debt-funded expansion
- Increasing spending on store-level staffing
Since Homeister's tenure as CEO started, the company has reduced debt by 74%, freeing up cash flows from interest expense to invest in retaining its best employees. And management has said that these efforts -- giving store employees solid career prospects -- have slashed turnover and boosted tenure sharply. And that's helping drive sales and profits higher, especially with professional customers such as remodeling professionals and homebuilders.
While these efforts did come at the price of slowed growth in the past two years (Tile Shop opened about half as many stores as it had been), the company is much better positioned now for steady, more profitable growth. After two years of work, the company has a solid bench of managers ready as it launches into its next phase of expansion, with lower debt and a renewed focus on its best customers.
And with a market cap of less than $1 billion today, Tile Shop has the potential to grow much, much larger. Patient investors willing to buy now and hold for many years could do very well to invest in Tile Shop.
