When it comes to investing, some folks like to emphasize the stock picking aspect. I view investing as more of an exercise in patience. I'm well aware that not every company I buy is going to be a winner. In fact, 13 of the 39 stocks held in my portfolio were below my cost basis, as of March 25.
However, I also know that winning stocks tend to keep winning over time. It's why my largest holding has gained nearly 1,500% from my cost basis and can more than offset all of my unrealized losses many times over. All it takes is a couple of 10X returns to really transform an investment portfolio into something great over time.
Among the 39 stocks currently in my portfolio are three that I fully expect to deliver 10X returns, if not greater.
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PubMatic
The first stock that I believe offers incredible upside potential is cloud-based advertising technology company PubMatic (PUBM 0.33%). PubMatic is a new addition to my portfolio, with three separate purchases between March 7 and March 14. With a cost basis of $19.72, I'm effectively expecting this to become a $200 a share stock at some point in the future.
The key growth catalyst is the steady shift of advertising dollars from print to digital formats. PubMatic is a sell-side provider within the programmatic ad space. In English, this just means it sells display space for publishers. Interestingly, though, PubMatic doesn't always fill display space with the highest-priced ad. Rather, the company's machine-learning algorithms look to place the most relevant content in front of users. This way advertisers stay happy and publishers are afforded more pricing power over time.
Something else to note about PubMatic is that it built its cloud-based infrastructure. Since it doesn't have to rely on third parties, the company is beginning to see the fruits of its investment pay off. Thanks to scale-based efficiencies, gross margin climbed to 74% in 2021, with operating expenses as a percentage of total sales falling to 48% from 61% two years ago.
Furthermore, PubMatic is crushing expectations. Whereas global digital ad spend is increasing by a low double-digit percentage annually, PubMatic delivered an organic growth rate of 49% last year. Over the next two years, the company should be able to double the industry's average growth rate, thanks in part to rapid growth in mobile and connected TV ad spend.
PubMatic is profitable on a recurring basis and set to grow by 20% annually for what seems like many years to come. It's positioned perfectly to take advantage of the migration of ad dollars away from print.
Image source: Getty Images.
Bark
The second stock I'm confident can deliver 10X returns in my portfolio is dog-focused products and services company Bark (BARK 0.94%). Bark is one of the aforementioned 13 stocks I'm currently underwater on. However, if shares reach about $70 at some point in the future -- a figure I'm perfectly comfortable with this company hitting -- I'll have 10X'ed my cost basis.
The first reason I view Bark as a no-brainer buy has to do with the ownership statistics and dollar figures supporting the pet industry. According to the American Pet Products Association (APPA), the percentage of U.S. households that own a pet has increased from 56% in 1988 to 70%, as of its 2021-2022 survey. This works out to more than 90 million U.S. households, 69 million of which are estimated to have a dog.
What's more, an estimated $109.6 billion was spent on companion animals last year. It's been at least a quarter of a century since year-over-year spending on pets declined. This means not even the dot-com bubble, Great Recession, or COVID-19 pandemic could keep pet owners from opening up their wallets for their furry family members.
What makes Bark so special is the company's direct-to-consumer (DTC) focus and innovation. In terms of the former, Bark ended December 2021 with 2.3 million active subscribers and had 84% of its fiscal third-quarter sales originate from its DTC segment. Having such a large percentage of its sales tied to subscription services helps to keep its overhead costs down. As a result, Bark has consistently produced juicy gross margins between 55% and 60%.
In terms of innovation, the company introduced a number of new services during the pandemic. This includes Bark Home, which provides basic necessity products like beds, leashes, and collars, as well as Bark Eats, which works with owners to craft personalized dry food diets for their pooch. The key point being that cross-selling opportunities have gone way up.
If Bark can continue growing by 20% to 30% annually, I don't see it having any issue eventually becoming profitable and delivering 10X returns in my portfolio.
Image source: Getty Images.
Lovesac
The third stock I fully expect to deliver 10X returns in my portfolio is furniture company Lovesac (LOVE 2.21%). This is a bit of a cheat given that Lovesac is already a little more than halfway there (my cost basis is $8.26). But based on the catalysts I've seen from this company and its management team, a 20X return (i.e., a $165 share price) might be well within reason.
In general, there's no better way to put your friends or family to sleep than to say the words "furniture stock." The furniture industry is heavily reliant on foot traffic into brick-and-mortar retail locations, and many of these retail outlets buy from the same small group of wholesalers. What Lovesac is doing is innovating on the furniture front and dazzling with its omnichannel sales platform.
Although some folks might be familiar with Lovesac because of its beanbag-style chairs (known as "sacs"), the company generates about 85% of its revenue from selling sactionals. A sactional is a modular couch that can be rearranged dozens of different ways to fit virtually any living space. There are about 200 different machine-washable cover choices that sactional buyers can purchase, meaning every color or theme of a home can be matched. Further, the yarn used in these covers is made entirely from recycled plastic water bottles. As I've previous pointed out, customers are getting function, choice, and eco-friendliness rolled into a single, unique product.
Equally important has been management's willingness to shift the company's sales strategy during the pandemic. Whereas most furniture stores were hamstrung by a significant reduction in foot traffic, Lovesac was able to shift nearly half of its sales online. Leaning on DTC sales, as well as partnerships and pop-up showrooms, has allowed Lovesac to keep its overhead costs down. The end result has been the company reaching recurring profitability two years ahead of Wall Street's forecast.
I know it's "just furniture," but Lovesac is offering products that no other company has yet to match. That makes it a good bet to continue growing by 20% or more annually for years to come.
