The ultimate dream for investors is to make a ton of money in the stock market. If you're lucky enough to have a stock turn into a 10-bagger -- an investment that will grow by 10 times your initial purchase price -- you'll have reached investing nirvana. After all, who wouldn't want to put down $10,000 and see it turn into $100,000?
But how do you find a stock that can deliver such an incredible return? What are the tricks and theories successful investors use to find stocks with 10-bagger potential? Three successful Motley Fool contributors share with you their secrets to finding stocks that can bring you to the pinnacle of financial success.
10-baggers come to those who wait
Barbara Eisner Bayer: Investors looking for stocks that can turn into 10-baggers need to identify companies that have visionary leadership, a great product or service, and a low market cap -- or else how could they possibly grow? They also need nerves of steel, as patience and a long-term vision are indisputable requirements.
I found one back on Aug. 22, 2012, that's delivered a total gain of 1,302%. When I bought it, the company had recently done an initial public offering (IPO) -- the largest technology IPO in history at that time -- but the stock price dropped significantly thereafter. Can you guess which company that was? Surprise... it's Facebook (FB 1.83%).
The social media pioneer was just getting started. At its IPO, Facebook had only 845 million users, and I was one. (It had 2.8 billion users as of Q4 2020). Although I had shied away from other pioneers in social media like Myspace and Friendster, Facebook hooked me in because I was able to connect with family all over the world through one easy interface. I also was impressed by its visionary leader, Mark Zuckerberg, who started the company while at Harvard and now was playing with the big boys on Wall Street.
I thought the IPO price was a bit steep at $38 a share, but I was watching it -- in fact, I watched it drop all the way to $19.29 before I decided to buy. (And even though it dipped all the way to a low of $17.73 on Sept. 4, 2012, I didn't sell.) Facebook hit all my requirements: It had a great product that I was excited about, a visionary leader, and was just small enough. But most importantly, it had amazing potential.
But in order to achieve 10-bagger status, there was another important factor: I had to wait. When I bought FB, I said to myself, "You're a long-term investor...so practice what you preach. Hold on to this stock through thick and thin, no matter what happens to the company, so you can see if your long-term investing theory plays out."
And that's what I did. I've held on through its regulatory hurdles, privacy issues, censorship, content challenges, and mounds of litigation. I've also held on through its acquisitions of Instagram, What's App, and Oculus VR, which are all turning out to be very big deals. And because of my long-term vision for the company, it's now become a 10-bagger-plus. And that's the way I like it!
A powerful combination, when you can find it
Chuck Saletta: My ideal 10-bagger candidate is a company that has all of the following going for it:
- A business line that solves a key need for its customers
- Enough of a moat so that it can earn a decent margin on its wares
- Sufficient financing to reach the point of self-sustaining profitability
- Early enough in its lifecycle that it has room to grow even if it looks richly valued
That combination of factors made Intuitive Surgical (ISRG 2.62%) a life-saving and world-changing potential 10-bagger candidate in its early days as a pioneer in the field of robotic surgery. When I first published that linked article, Intuitive Surgical closed at a split-adjusted $33.83 per share, which makes its recent price of $807.81 well beyond 10-bagger range.
The field of robotic surgery that it pioneered addressed several key needs, including faster recovery time for patients, better visibility for doctors, and less need for blood transfusions. Those benefits can make it worthwhile for hospitals to invest the seven-figure amount typically needed to get one of Intuitive Surgical's robotic systems in place.
In addition to those benefits, a key reason Intuitive Surgical can command such a premium price for its robots is the fact that medical devices are a very heavily regulated industry. For a competitor to enter the field, it must bring in its own innovation that doesn't infringe on any of Intuitive Surgical's active patents while still passing all the hurdles to get through regulatory clearance. That's a tough set of requirements to achieve, while Intuitive Surgical continues to pile up customers and success stories.
Although Intuitive Surgical had already reached profitability by the point I first heard of it, the company had significant enough financial backing to reach that point. Even at that point, however, it was still early enough in the adoption cycle of its products to provide investors with a decent pathway to 10-bagger returns.
Looking for the trifecta
Sean Williams: Given how volatile the stock market has been over the past year, I believe it's important to point out that 10-bagger opportunities develop over time. What we've witnessed recently from the likes of GameStop, AMC Entertainment, and Sundial Growers is nothing more than a lottery ticket or dart throw. Investors should actively avoid emotion-based momentum plays.
When I'm scouring the market for companies that could yield a 1,000% or greater return, I'm often looking for the trifecta of innovation, disruption, and sustainability.
- Innovation: I want to own businesses that remain forward-looking and continue to develop products and services that'll improve upon or replace what's already available.
- Disruption: To build on innovation, it isn't enough to simply sit back and go with the status quo. I'm after businesses that are also looking to disrupt industry norms. Admittedly, disruption can look very different across the various sectors and industries of the market. For example, disruption in the utility sector might be something as simple as an electric utility pushing heavily into renewable energy long before Washington mandates such moves. Meanwhile, in the healthcare sector, it might mean a new drug, device, or service that's an absolute game-changer for millions of Americans.
- Sustainability: Perhaps most importantly, 10-bagger stocks demonstrate the ability to hang on to their competitive advantages. Whether they're constantly innovating, benefiting from first-mover status, or challenging the status quo, their moat is well-protected.
Teladoc was a clear beneficiary of the coronavirus pandemic. Physicians wanted to keep potentially infected and high-risk patients out of their offices, which sent the company's virtual visit count soaring. But this was an ongoing trend well before the pandemic (75% average annual sales growth between 2013 and 2019 for Teladoc).
The ability to consult with general practitioners and specialists virtually is a win-win-win throughout the healthcare space. It's more convenient for patients, allows physicians to fit more consultations into their schedule, and is billed at cheaper rates than office visits, which insurers love.
Teladoc also acquired applied health signals company Livongo Health in November, further differentiating its telehealth offerings and likely securing its cash flow and growth potential for a long time to come.
Great businesses are out there. If you can find companies that check all three boxes, you might be on your way to 1,000% returns over the long run.