Did you miss out on most of Nvidia's (NVDA +1.05%) heroic 1,400% run-up from its 2022 low? Don't beat yourself up too much if you did. Nobody caught all of it. Heck, few investors even caught most of it. Although the artificial intelligence revolution was getting going around that time, it's the kind of opportunistic growth story that didn't become evident until well after the fact.
This somewhat frustrating truth raises an important question: How exactly might someone spot such a great opportunity in time to turn a trade in it into a 10-bagger megawinner? Plenty of people did well enough with similar growth stories from Amazon (AMZN 1.47%), Apple (AAPL 0.23%), and Netflix (NFLX +0.91%). But nobody seems to know anybody who actually cashed in the bulk of these stocks' amazing gains.
With this in mind, using the common elements of what turned out to be some of the stock market's biggest winners, here's a helpful primer on how to identify companies capable of producing these sorts of gains early enough to actually matter.
Image source: Getty Images.
The product or service is something the world truly needs and wants
It should be obvious, but it needs to be spelled out all the same -- the biggest winners of this century are stocks of companies that actually sell what consumers (or businesses) want as much as they need.
Think about the aforementioned Amazon. Even before e-commerce was a structured industry, founder Jeff Bezos saw the potential of being able to shop for everything from the convenience of your home rather than driving to a store only to find out it didn't have what you wanted to buy.
Or Apple. While smartphones technically existed before then, the smartphone race didn't start in earnest until Apple turned mobile phones into easy-to-use mini-computers by unveiling the very first iPhone back in 2007, giving consumers something they didn't know they wanted, or even thought was possible.
NASDAQ: AMZN
Key Data Points
There's actually a sustainable market for the product or service
There's an important aspect of the first requirement ("the product or service is something the world truly needs, and wants") that merits its own special mention. That is, demand for a product or service must not only be real, but legitimately sustainable.
To effectively drive the point home, it might make the most sense to point out a well-touted business that was never actually going to thrive -- at least not for long. That's GoPro (GPRO +2.95%). While it undeniably makes the best action cameras in the world, the world doesn't actually need all that many action cameras (and most consumers certainly don't want or need to buy one over and over again, with only modest improvements with each iteration).
It's also worth adding that GoPro never had a very wide moat. Camera technology is tough to protect with patents, and to the extent such patents exist, they're pretty widely dispersed among all consumer-facing technology outfits.
Or think about meal kit companies like Blue Apron and HelloFresh. The idea seemed brilliant at the time. As it turns out, however, many households (particularly in the United States) are too busy to cook and eat the way meal kits require them to. That's why most of the remaining players in the industry are still struggling. HelloFresh, for example, reported a 12% decline in orders for the first half of this year, accelerating last year's 4% slide.
And that product or service is difficult (if not impossible) to copy
We can now look back and see there was also never a defensible moat for the meal kit business -- anyone who wants to get into the business can get into it, with several of its newer players being grocers that are in a far better position to meet busy consumers' actual needs.
Conversely, several consumer technology companies have since developed relatively impressive smartphones, just as other streaming companies have entered the fray with Netflix. None have quite been able to replicate the charm and magic of this product and service (respectively), though; being first to the market helps enormously, just as with Amazon.
However, a moat doesn't necessarily need to be a lifestyle or timing or convenience-minded one, or even one stemming from being the name to create an industry like Netflix did. In many instances, a strong patent portfolio is enough to keep competitors in check. Arm Holdings (ARM 4.15%), for instance, holds a bunch of patents on hyper-power-efficient computer processors, and is finally able to cash in now that data center owners realize how much electricity less-efficient silicon is consuming.
NASDAQ: ARM
Key Data Points
The business is scaling up rather than waiting for a specific growth catalyst
Contrary to a common assumption, you don't necessarily always want to "get in on the ground floor" of a company with little more than an idea. While it feels like you may end up being late to the proverbial party, too many young enterprises never actually get meaningfully past the idea stage. We see it quite a bit within the biopharma arena, for instance, where the vast majority of clinical drug trials end in failure before even getting close to an approval.
Rather, while you want to get in early, you also want to see enough evidence that a company's product is increasingly marketable.
Take Amazon as an example. Although it was launched in 1995 and went public in 1997, its survival wasn't a foregone conclusion until after the market and economy started to bounce back from the dot-com crash in 2002. The company was still growing then, and at least making clear progress toward profitability, even if it was still technically in the red. That would have been an ideal, reasonably safe time to step in.
The company isn't massively dependent on debt
Debt in and of itself isn't fatal. But, it is a burden that chips away at a company's fiscal flexibility that it might otherwise want -- or need -- to invest in its own growth. It's worth noting that Amazon, Apple, Netflix, and Nvidia never took on a debilitating degree of debt -- even in their early days. They were more likely to issue stock to raise funds. This was an annoying dilution to existing shareholders at the time it was being done. In the long run, though, it arguably ended up being the smarter move.
Corporate culture and compelling leadership matters
It's not exactly clear if bigger-than-life leaders create bigger-than-life companies, or the other way around. What is clear, however, is that most of the market's very biggest winners tend to be led by the planet's most-watched CEOs.
That doesn't mean every potential 10-bagger must have a Jeff Bezos or a Steve Jobs at the helm; there will never be another Steve Jobs. But, there does tend to be some executive personality with the market's most investable companies, even if that persona is something of an anti-personality -- like Nvidia's straitlaced CEO, Jensen Huang, who not only co-founded the company, but is also an electrical engineer. His level-headed demeanor only makes the occasional "zinger" all the more noteworthy. Such big personalities are also woven into the fabric of a corporate culture. It's just enough of an edge to keep that organization a step ahead of the competition.
These personalities also simply garner attention for the company in question, as well as draw a crowd of interested investors.
NASDAQ: NVDA
Key Data Points
Yes, luck is a factor, too
Finally, as frustrating as it might be to hear, just because a company checks off all the criteria above doesn't mean it's going to be a 10-bagger, and just because a company doesn't quite fit the aforementioned mold doesn't mean it necessarily won't become a megawinner. There's a matter of luck and judgment at play as well.
But you can still set yourself up to experience more luck than most people do.
See, you really only need one or two of these kinds of mega-winners for your portfolio's value to soar. The rest of your holdings can be merely average performers, and you'll still do well. You just don't want to suffer a bunch of total or near-total losses by swinging for the fences and missing every time. That's what using the criteria above should help you avoid. Even if not every name you come across that checks off all the aforementioned turns into a 10-bagger, they're still going to be pretty solid investments.
